FUTURE OF FUTURES
at the New School for Social Research,
New York, New York,
October 28, 1983.
predict the future is both dangerous and difficult. This is
especially true for those of us in the futures industry. Still,
we are often asked to do so and we must make the attempt. It
is gratifying to find that at least some of the time our predictions
were not far from the mark.
following address was presented at a time when many from within
and outside of our industry were lamenting the proliferation
of new contracts. Proliferation, they said, represented a dangerous
trend that would ultimately crush our industry. It was an old
theme by those who distrusted the market's inherent ability
to determine which products are necessary and which are not.
These nay-sayers proposed a legislative solution to the perceived
problem. Fortunately, we repulsed this onslaught. One must
be forever vigilant or we will surely either regulate ourselves
out of existence or hand over our destiny to others.
is the present that matters. . .Those who talk about the future
are scoundrels." Those sentiments, espoused by the French novelist,
Louis Celine, a bit of a scoundrel himself, epitomize a mind
set embraced by many. Indeed, while it is true that the present
matters, to someone who represents an industry so intertwined
with the future that it has the audacity to call itself futures,
it is a rather disheartening contemplation. Instead, equally
true and perhaps even a bit more profound is John Galsworthy's
declaration: "If you do not think about the future, you cannot
admonition is of particular significance to us within the futures
industry—an industry whose dynamics are in constant flux and
whose evolutionary changes are dramatic. In our industry, perhaps
more than any other, there is abundant evidence that those who
fail to contemplate and prepare for the next step in our expansionary
journey will be swiftly left behind and faced with the impossible
task of catching up. Our historical scrap heap is replete with
examples of those who forgot this truth. For in our industry,
to think about the future of futures is the quintessential element
so much at stake, how can we prepare for that exclusive domain
of providence? How can we predict the unpredictable? How can
we harness this elusive prize, so effected by consequences over
which we have no control? What are the guidelines? Which crystal
ball should we use?
philosophers tell us that the future is simply a consequence
of the past and therefore one should look backwards for guidance.
As Patrick Henry put it: "I have but one lamp by which my feet
are guided, and that is the lamp of experience...I know no way
of judging the future, but by the past."
does repeat itself and past reference can be an excellent preview
of coming events. But can such conventional wisdom be valid in
our case; can our past be a guidepost to our future? The answer
is disconcerting. In the span of twenty years, less than a blink
from a historical perspective, futures markets experienced a
metamorphosis of such dramatic proportions that it defies comprehension.
Our recent revolutionary experience represents a phenomenon with
few equals in the business arena. And most of the significant
changes occurred in the last decade.
markets, which since time immemorial were the unique and exclusive
domain of agriculture, seemingly overnight became an integral
mechanism of finance. Our markets, which for more than 100 years
were strictly limited to tangible and storable products, suddenly
shed these fundamental requirements and embraced live animals,
foreign exchange and government securities. Our markets, whose
defined boundaries precluded entry into the sphere reserved for
securities, brazenly transgressed the dividing line by inventing
instruments which blurred the age-old distinction. Our markets,
whose birth-right necessitated a system of physical delivery,
broke their genetic code and engendered products without a delivery.
Our markets, whose universe was so insignificant that in 1962
they could generate only 5 million transactions, experienced
a 2200% increase a decade later. Our markets, which only yesterday
were viewed with scorn and considered barely at the edge of respectability,
are today an indispensable member of the financial family. Our
markets, whose merits for decades were recognized by the users
from but a handful within the U.S.A., are suddenly attractions
for a multitude of financial centers around the globe.
we in all honesty expect that our markets will, in the next twenty
years, equal or even approach the futures revolution of the past
two decades? It is doubtful at best. I therefore caution that
Patrick Henry's formula for forecasting the future by virtue
of the past may not be quite applicable to our industry.
next twenty years should be an era of enhancement, entrenchment
and maturation of our markets. The conceptual breakthroughs and
inventions of the futures revolution desperately demand time
for our markets to explore their new territories, to fortify
their new bases, for their new identities to mature. Thus, if
the futures revolution of the past two decades can be defined
as representing a horizontal advancement, the next two decades
will be of vertical dimension, capitalizing on the conquests
of the sixties and seventies.
new directions we have assumed, the new inventions we have produced,
deserve and will receive our full attention. Indeed, it would
be an unconscionable disservice to the labors of the past if
we did not now spend the time to explore and exploit their full
delivery unshackled futures from its most burdensome constraint,
one that represented an insurmountable wall around its existence.
Cash settlement in lieu of physical delivery enables us to contemplate
and explore the market applicability of concepts and intangibles
never before possible for futures trade. This unlimited potential
will no doubt challenge the minds of even the most provocative
me to state for the record that this new era would most likely
never have transpired without the existence and courage of the
Commodity Futures Trading Commission (CFTC). The concept of cash
delivery—so simple and universally accepted a methodology for
settlement of contractual obligations (one that is commonplace
in every other field of business or walk of life)—was obstinately
and irrationally barred to us and would have remained so were
it not for the CFTC. It was only by virtue of the public faith
placed in the wisdom of a congressionally-ordained entity that
the issue of cash delivery had a chance to be resolved in our
favor. It is to the CFTC's everlasting credit that this was accomplished
and unquestionably will be recorded as one of its paramount achievements.
first wave of index futures is but a sample of what lies ahead.
Indexes have become the ubiquitous tools of management in every
form of enterprise; they run the gamut from the private to the
public sector, from finance to agriculture, from the very specific
to the very general. Currently contract markets are discussing,
or developing indexes on corporate and municipal bonds, insurance
and freight rates and consumer prices, agriculture and components
of agriculture, real estate, retail new car sales, and others
too numerous to mention. In some cases, the index proposed is
already in existence and compatible with the mechanics of futures;
in others, refinement is needed; still, in others, the index
must yet be created. However they are chosen or constructed,
there is little doubt that in the coming years many will be tested.
Options on indexes will also be attempted. Obviously, not all
indexes will take to options; some will do better than the traditional
futures vehicle while others will function best in parallel fashion.
Still, the specter of options on futures exchanges goes far beyond
the index markets. The very nature of the option mechanism is
so different from the traditional futures contract, it spells
yet another new dimension for our market potential. In similar
fashion to indexes, options will run the gamut from agriculture
to finance, and from the specific to the general. Options will
offer market applications never before possible and will attract
participants who never envisioned using a futures broker.
new markets will not be limited to index and options. The futures
industry thrives on change and responds quickly to new opportunities.
As a need becomes apparent, our markets will have the foresight
and competitive motivation to respond, just as energy futures
resulted from a sudden crisis in the world oil supplies and as
currency futures were spawned by the breakdown of the Bretton
Woods Agreement. And each new invention will spur yet another
all new contracts will succeed. There are bound to be failures
along the way as there have been in the past. That is the price
of success and competition. We should ignore those who fret about
proliferation. The marketplace itself is the only and best determinant
of which ideas are viable and which are not. Those products that
are flawed will fail quickly enough; those that are redundant
will find it most difficult to compete; those that do not answer
a specific need will find few users. The market should make this
determination rather than some regulator or industry committee.
The dynamics of our industry are such that it must continue to
explore, experiment and invent in order to respond to a current
or prospective need—either real or imagined.
the coming years, futures will continue to produce new contracts
of trade that will represent extensions of inventions and advances
already achieved. The new era will also harvest the fruit of
past labors which produced today's futures new stature and astonishing
growth in transaction volume—two highly significant achievements.
The initial volume surge resulting from the first series of index
contracts is but a preview of the quantum leap in transactions
for our markets. The eventual exponential result will catapult
futures to a level of prominence never before contemplated.
transaction increases will not necessarily be uniform or across
the board. Instead, we should expect the expansion process to
be selective, favoring one sector at a time, then moving to another
and back again. Nor should one expect each successive year to
consistently beat the previous year's record. There is bound
to come a period of relative price stability or world depression
during which the need for futures is diminished with an attendant
drop in transaction volume. Such periods will no doubt find doom
sayers who will gleefully say that our industry is finished.
These voices will quickly be stilled during the next period of
uncertainty or price upheaval that will surely follow. This leads
to the inevitable conclusion that those exchanges having the
most diversified product mix will be best-placed for continued
prosperity. Those contract markets with but a limited product
base must bear this in mind or face the consequences.
is also imperative to underscore the value of our agricultural
roots. Our nation's international role as a primary food producer
is not about to diminish, nor will the world's demand for these
products. Similarly, the cyclical supply of these markets is
not likely to change. One era of oversupply and low futures volume
will surely be followed by its opposite. Consequently, agricultural
futures—like their financial counterparts—will experience periods
of prominence and their necessity both as a hedging mechanism
and as an investment tool will continue.
with the expected transaction explosion will come its consequential
counterpart—prestige. This represents the culmination of a process
that began just ten years ago with the introduction of financial
futures. Since their inception, our markets gained more acceptance
and respectability than during the first 100 years of their existence.
The coming era will, at long last, witness attainment by futures
markets of stature-parity with the most-revered temples of finance.
success on this scale will also bring commensurate problems and
dangers. The federal bureaucracy will increase its internal struggle
for jurisdictional control. There will be congressional demands
for stronger enforcement policies, stronger regulations and stronger
federal agencies. As the definition between futures and securities
markets continues to blur, the SEC and CFTC will argue over our
turfdom and their composition and division of authority may dramatically
change—especially as the lines of definition between futures
and securities markets continue to blur as they are bound to.
Alas, there will also be scandals and failures and surely there
will be new legislation.
external successes combined with internal pressures will also
change our infrastructure. Exchanges will become more alike as
rules and practices of trade become much stricter and more standardized.
A tougher and higher qualification standard will be established
for members—both brokers and traders. Although the present auction
order execution system will survive for the foreseeable future,
it will become more mechanized and subject to new technologies.
Our present system of separate clearing entities may ultimately
vanish and be replaced by a central clearinghouse for all the
exchanges. A comprehensive mechanism for financial integrity
will be established to adequately protect all member firms and
perhaps even a national insurance program for their customers.
Toward this end, the National Futures Association (NFA) will
play a central role as it becomes an additional source of industry
strength, unification and oversight.
present trend of complementary arrangements between different
exchanges—both futures and securities—will continue. One should
also expect mergers between some markets. Surely, most of the
New York markets will one day unify. Similarly, mergers and acquisitions
of member firms will continue, resulting in a reduced family
of clearing members who are members of every contract market.
the coming era, our futures markets will complete their long
international journey as different world centers of futures trade
join the ranks of their North American counterparts. Clearly,
LIFFE should remain the dominant European market, while Southeast
Asia will most likely be represented by markets in Singapore,
Sidney and Hong Kong. Someday, of course, futures will come to
Japan. Most important, we will finally realize futures trading
on a 24-hour basis. Not only will futures participants include
institutions and investors from every corner of the globe, ultimately
most of our markets will have a single offset system.
the future of futures is promising, secure and challenging. If
the next era is less dramatic than its predecessor, blame it
on the successes of the past. At the same time, we are grateful
the futures revolution we started and successfully consummated
gave us new scope, dimension, strength, and extraordinary potential.
predictions carry the same qualification as do all my market
prognostications: They are only good till cancelled—normally
valid for a full 30 seconds.
by permission. Excerpted from Melamed on the Markets, by Leo
Melamed. John Wiley & Sons, 1993
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