REST OF THE STORY
of the CME Fred Arditti Innovation
January 18, 2005
preparing for my remarks tonight, I was in a quandary. Clearly,
I had to talk about innovation, but what to say? Much of what
I wanted to say is already found in the brochure about the CME
Center of Innovation that is at everyone’s table. I was stumped.
And then I remembered a book published a while back, actually
in 1996, entitled The Greatest Business Stories of All Time.
It was written by Harvard-trained historian Daniel Gross in conjunction
with the editors of Forbes magazine. Perhaps, I thought, it will
give me an idea for tonight.
book was fascinating. It gave me an insight into some great American
innovators who changed the nature of America and the world. Some
of these stories I knew, others not.
instance, I learned about Robert Morris, America’s First Financier.
was reminded about Cyrus McCormick and his reaper factory on
the banks of the Chicago river that mechanized American agriculture.
was fun to read again about the genius of John D. Rockefeller,
and although he was attacked as "the father of trusts, the king
of monopolists, the czar of the oil business," how he is credited
with inventing the modern corporation.
was thrilling to read again about the exploits of J.P. Morgan
and why he gets credits for promoting the need of a central government
agency–namely, the Federal Reserve System.
I enjoyed the Henry Ford story all over again, and how the Model
T completely transformed our nation’s way of life.
had forgotten how Charles Merrill is credited with the democratization
of stock ownership.
course, I knew about Sam Walton’s "buy it low, stack it high,
and sell it cheap."
also knew how Ray Kroc made it possible that the French fries
a customer bought in Topeka would be the same as the ones sold
in New York.
was also fun to read about David Sarnoff and how RCA gave us
to be reminded how Walt Disney created the Family-Entertainment
that it was American Express that introduced us to the charge
card, forever replacing our need for money.
how Intel compacted the power of a 3,000 cubic-foot computer
into a chip smaller than a fingernail.
finally, to again review the genius of Microsoft and Bill Gates.
the CME story did not find its way into The Greatest Business
Stories of All Time, in my view it deserves consideration for
a future edition. The Chicago Mercantile Exchange, once the house
that pork bellies built, is today the house that innovation built.
That breathtaking history of innovation, I dare say, has few
equals and I submit is a great American story. Nobel Laureate,
Merton Miller, once stated that the simple standard for judging
whether a product increases social welfare is whether people
were willing to pay their hard earned money for it. By that standard,
these financial futures products proved their worth a billion
times over. They inaugurated the era of financial derivatives,
accelerated the movement toward financial engineering and OTC
products, and spawned financial futures exchanges in every corner
of the globe—from Argentina to Australia, from Italy to India,
from London to Kuala Lumpur. To paraphrase the words of Alan
Greenspan, the financial derivatives markets, which the CME has
played a critical role in developing, have significantly lowered
the costs and expanded the opportunities for hedging risks throughout
the economies of the world.
when I was finished reading, I realized the book had in fact
served its purpose. I knew precisely what my mission tonight
should be. It was my honor-bound duty to bring to your attention
the story of three people whose contributions, while virtually
unknown, are directly and materially connected with the success
of the CME and tonight’s celebration.
you know, financial futures began in 1972 with the launch of
currency futures at the International Monetary Market, the IMM,
a CME division specifically designed to specialize exclusively
in instruments of finance. Now there are any number of theories
put forth as what prompted the CME chairman of that day to initiate
the currency market. Among the most obvious reasons suggested
was the breakdown of the Bretton Woods Accord—the fixed exchange
rate agreement hammered out in the small resort town in the mountains
of New Hampshire after World War II. Another reason given is
the financial tsunami caused on August 15, 1971 when President
Richard Nixon announced the closing of the gold window. But while
these reasons are valid, the question still begs—what or who
prompted the idea in the first place?
here is the answer. It happened in Tokyo in April of 1941. An
eight year old named Leibl Melamdovich was listening to his father,
Isaac Melamdovich, a mathematics teacher, explain how the markets
really worked. Specifically, he asked if his son ever thought
about how the community of Jewish residents in Tokyo, the so-called
members of the newly formed Refugee Committee, who were far from
being rich people, had enough money to support the sudden influx
of some 3,000 refugees, the likes of the Melamdoviches, who had
escaped from the clutches of the Nazis to Japan? No? Well, to
understand that, my father explained, you have to understand
the intricacies of the marketplace.
explained that in Japan a citizen was forbidden to hold foreign
currency. However, if you were a foreigner who had an exit visa
to a foreign country, say, like to the US, you were allowed to
withdraw from a bank up to $50. Each dollar, my father explained,
was worth (say), 100 Yen, the official rate of exchange. However,
he admonished, "you must never trust the official rate announced
by government." The real value, he explained, could be found
only in the so-called Black Market. "Where," his son eagerly
asked, "is this Black Market?" My father responded with a wry
smile, "Oh, that’s everywhere, on the streets, in the shops,
in the back alleys, everywhere where a government official is
not looking." And on the Black Market, he said in hushed tones,
each dollar is worth (say), 300 Yen—the real exchange rate for
he said, looking at his son to see if he understood, once a foreigner
has been given an exit visa, like, say, to go to the US, a representative
of the Refugee Committee, goes with him to the bank, shows the
exit visa, deposits 5,000 Yen and receives $50. The money is
then registered with the ship’s Purser, and very quickly and
quietly returned to the Refugee Committee representative. Naturally,
the Refugee Committee now sells the $50 dollars on the Black
Market at 300 Yen to the dollar and receives 1,500 Yen in return. "The
1000 Yen profit," my father explained, again with a smile, "is
used to support the refugees in Tokyo."
the IMM’s currency idea to innovator Isaac Melamdovich.
of the salient aspects of financial futures contracts, indeed
one of the greatest plaudits that I have received over the years,
was in devising the quarterly listing of contract months. I have
been told by economists and business experts time and again that
this was perhaps one of my most brilliant moves. By establishing
March, June, September, and December as the primary contract
months of trade, I hit upon the perfect cycle for the purposes
of corporate needs, financial applications, quarterly tax payments
and so forth. Little wonder, that as the IMM financial futures
idea spread throughout the world, with but singular exceptions,
this quarterly formula was followed.
here is the skinny. When the original IMM Interim Committee met
in 1972 to establish contract specifications for currency contracts,
the question of delivery months was high on our agenda. Let me
underscore three critical factors of that day: 1) The products
of trade were exclusively in agriculture, 2) There had to be
physical delivery, and 3) The nature of trading was predominantly
still on blackboards. The pits were reserved for only the most
to Thomas Hieronymus, whose book on the "Economics of Future
Trading," was the bible at the time, the months for futures trading
was chosen on the basis of trade practices relating to the times
of growing, harvesting, and marketing of crops. Thus, our committee
had an unusual problem. There were no known time for growing,
harvesting, or marketing of money.
issue was hotly debated. There were two schools of thought. There
were the purists who said that since currency was in constant
supply, without a growing or harvesting season, there ought to
be a continuous flow of trade. In other words, if we were to
list a year of trade, as was our intention, there should be 12
trading months, straight through from January to December. It
was logical and simple. However, I led a the second school of
thought. In my opinion, for a futures market to be successful,
there had to be a little bit of mystery. In other words, a continuous
flow of trading months left nothing to chance and no room for
doubt. Rather, if some months of trade during the course of a
given year were missing, it would create additional mystery and
increase trade. Since I was chairman, my view prevailed. The
Interim Committee unanimously approved the listing of six contracts
per year, in other words, every other month. End of story----Not
I was walking out of the committee room, Tomas W. Peak, a CME
employee in charge of floor operations, tugged at my sleeve. "Leo," he
whispered, "I have to tell you something." When I stopped to
listen to what Tom had to say, I learned that because we intended
to list seven currencies—British Pounds, Canadian Dollars, Deutsche
Marks, Italian Lira, Japanese Yen, Mexican Pesos, and Swiss Francs—he
would need six blackboards for each currency to cover the year
and accommodate the Committee’s decision.
agreed, "we have to go out a full year."
that’s just it, Leo," he said, "we don’t have enough wall-space
for 42 blackboards."
I stuttered, "How much space do we have, Tom?"
can manage 28," Tom replied.
committee was called back into session.
the IMM’s quarterly listings to innovator Thomas Peak.
the idea of stock index futures, surely, one of the mainstays
of the CME. How and where was this idea born?
I was a young man at the CME, I often hung around with the old-timers
who roamed that floor. One of them was a little guy named Elmer
Falker. Here is how I describe Elmer in my memoirs:
any given day in the late 1950s, he’d stroll across the floor,
an elderly, cigar-chomping bachelor just under five-feet tall,
still wearing spats and driving to and from work in his spiffy
1932 Franklin. He could send an oyster into the corner spittoon
from 30 feet. I don’t know how many fortunes he had gone through,
but by the time I met him, he was broke. Rumor had it he lost
all his money waiting for a gap to be filled on the butter chart,
but the market never came back to fill the gap."
I became chairman in 1969, I again sought out Elmer Falker’s
counsel. I was looking to diversify the CME and I wanted to talk
about new products. We talked, potatoes, oranges, turkeys, shrimp
and all kinds of other things. Then one day, Elmer became thoughtful
and said, "The ultimate futures contract is of course Dow Jones
futures." I instantly understood the beauty of the concept. "Why
hasn’t anybody done it?" I demanded. Elmer looked at me and smiled. "You
can’t make delivery," he explained.
never forgot that conversation. "You can’t make delivery," would
echo through my mind again and again. But over time, Elmer’s
words took on a different refrain in my mind, "What if you didn’t
have to make delivery?" That question would not give me peace
until I could do something about it. When at last in 1981 the
CFTC approved the concept of cash settlement, Elmer’s ultimate
contract was finally possible.
stock index futures to innovator Elmer Falker.
Paul Harvey would say, "Now you know the rest of the story."
to top of page | Return to
Index | Home Page