to The Forward
New York, NY
March 17, 2000
attempt to predict the future is fraught with danger, and anyone
attempting to write about tomorrow's financial markets must do
so with all humility and with the express understanding that
what they predict may be totally off base.
a look at events during the latter half of the 20th century
may offer clues. During that period, transistors and their offspring,
the microchip, transformed everything: the computer, the space
program, the television, the automobile, telecommunications and,
to be sure, the markets. We migrated, said Walter Wriston of
Citicorp, to the "information standard."
Modern telecommunications capabilities fostered instant mass informational
flows in total disregard of internal prohibitions or national boundaries.
This proved to be the common denominator for the dramatic political
upheavals we witnessed in the last decades of that century.
connecting the world with instant information, the transistor
caused the earth to shrink. We call it globalization. Today,
as a result, for the first time in human history, nearly every
country on the planet has a market-oriented economic system and
is attempting to become a competitor in the global marketplace.
For the past 20 years when we spoke of a global economy, we were
talking about only 25% of mankindmostly North America,
Western Europe and Japan. And as recently as 1989, almost 70%
of mankind was living under Marxist or socialist economic systems.
Today, there are 3 billion more participants in the capitalist
system and every aspiring center of finance the world over wants
what America has.
America has, political and economic freedom, lies at the very
core of the success of American markets. But globalization also
demanded the invention of broad based instruments of finance
that would enable market participants to measure constant changes
in values and provide the means to hedge the resulting exposures.
The era of financial derivatives was born in response, primarily
on the floors of American futures exchangesthe veritable
hub of innovation throughout the 1970s and 1980s. This era acted
as the primordial soup upon which financial engineers used computer
technology to unbundle existing financial risks into their basic
components. It enabled risk to be allocated to those investors
most able and willing to take it. In doing so, these financial
instruments increased liquidity in capital markets and helped
develop a more efficient global intermediation process. As
a result, financial derivatives have played a major role in fueling
the economic engine that brought America and the world to the
current state of unprecedented prosperity. In the words of the
chairman of the Federal Reserve, Alan Greenspan, By far the
most significant event in finance during the past decade has
been the extraordinary development and expansion of financial
derivatives....a process that has undoubtedly improved national
productivity, growth and standards of living.
is not anticipated that the role of financial derivatives in
tomorrows financial markets will diminish. These instruments
are used to protect against interest rate and exchange rate exposure,
to manage assets and liabilities, to enhance equity and fixed
income portfolio performance, to protect against commodity price
rises or mortgage interest expense.
a consequence of their application, risks are reduced and profit
is increased over a wide sphere of financial enterprise and in
various ways___from businesses whose efficiency is
enhanced to banks whose depositors and borrowers are benefitted;
from investment managers who increase their performance for clients
to farmers who protect their crops; from commercial users of
energy to retail users of mortgages. But while the application
of these financial instruments will remain, the means by which
they are applied will change dramatically.
in stark contrast to the signals at the at the beginning of the
20th century, the evidence today is overwhelming that the next
century will be dominated by the information standard. Today,
millions of transistors are etched on wafers of silicon. On these
microchips, all the worlds information can be stored in
digital form and transmitted to every corner of the globe via
is no leap in logic to assume, as many have, that information
technology will be to the 21st century what electricity was to
the 20th century. The Digital Age will change, and is changing,
the way we live, work, playand the way the markets work.
The markets of the future will be automated. The traders of the
future will trade by way of the screen. Those who dare ignore
this reality face extinction.
cyber-wizards have combined the magic of all electricity and
physics to produce a sorcery that can carry a computer command,
the human voice or virtually any program including market information,
quotations, analysis, and market orders from anywhere to anywhere
at a speed of about three-quarters of the way to the moon with
unplugging ourselves from existing infrastructures, networks
of information, and communication hookups, we will suddenly have
many more choices about where we live and work, and how we trade.
Telephones as we knew them will soon be history. Everyone will
be connected, carrying small pocket devices that will not only
be used to communicate but to download money or to trade. The
new technology will have merged the computer, communications
and the Internet into a small wireless marvel. Wireless e-mail
will be the dominant personal telecommunications instrument and
the trading mechanism of choice. Tiny chips might even be implanted
in our bodies that could act as a universal credit card, passport,
drivers license or even to transmit buy and sell orders.
Surely, national and economic borders that have already been
blurred, may dissolve completely, as communication satellites
enable consumers and traders to do transactions in cyberspace.
And now that we have seen the birth of the Euro, representing
a single currency for much of the European zone, and there is
serious talk of a similar dollar zone for the Americas, perhaps
in the 21st century a one world currency will evolve___digital
be sure, the Cyberspace Age will cause an enormous shift of power
from the producer to the user. Technology is a force for democracy
and individual empowerment. The consumer will become king because
the Internet changes the old rules. Consumers who dont
like what they see will just click and move on to the next screen.
Those corporations who are merging and are betting that bigger
is better may be looking in the rear view mirror; with the cost
of entry lower and easy access to the global marketplace via
the Internet, competition may come from smaller entities with
a flexibility to offer innovative services. In the past, success
in business had three rules: location, location, and location.
In the future, where you are located may not matter.
all of this is exciting and promising, we must conclude by injecting
a note of caution. The only certainty about the future is to
expect the unexpectedwhich by definition is unpredictable.
The road for markets that I have suggested may not happen at
all, and if it does, it certainly will not be in a straight line
fashion. There are bound to be diversions, detours and disasters
along the way. Euphoria about present market conditions may abruptly
and unexpectedly turn into disillusionment. But those of us in
the markets are commissioned not to shrink from the unforseen,
nor to fear failure. We are commanded by our profession to seek
new market solutions and respond to difficulties as they arise.
Above all, we must not become victim to what Rose and Milton
Friedman call "the tyranny of the status quo." New
ideas and innovations must remain our credo.
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