1988 Annual Report.
was axiomatic that a trading system that utilized automated
electronic capabilities epitomized the ultimate threat for
members of the futures industry. It erroneously represented
the proverbial Darth Vader who would destroy their coveted
open outcry world and eliminate the trading pit in favor of
the "black box"—a computer-driven marketplace. But it was
equally axiomatic that automation, electronic competence, and
technological advancements were inexorable forces that would
overwhelm anything that stood in their way. Those who ignored
the march of technology were soon banished to the historical
scrap heap of failures. In other words, use it or lose it.
foregoing ideological conflict seemed to represent a dilemma
of Hobson's choice proportions for many within our industry.
It caused many to simply shun the issue, for to contemplate
technological automation in the transaction process was suicidal.
Still, for some of us, the challenge was inevitable. To bow
to the demands of status quo simply because of fear of change
was unacceptable. To me, innovation was no idle concept to
be admired from afar. Indeed, market innovation was as essential
to me as the very oxygen we need to stay alive—it was the critical
trait that made us different and empowered us to bring the
Chicago Mercantile Exchange to the forefront of financial markets
the concept of GLOBEX was born. Because we could not ignore
the reality of competitive demands engendered by modern technology,
because we realized that without automated electronic competence,
our futures contracts would be limited to the regular business
hours of the American time-zone, because our market share was
threatened by foreign competitors, we chose to meet the challenge
with a computer-based electronic after-hours trading system.
The trick was to convince our members to embrace this reality.
a referendum held on October 6, 1987, the members of the Chicago
Mercantile Exchange voted overwhelmingly in favor of the GLOBEX
concept by a vote of 3,939 to 526. The following was the rationale
behind our victory.
futures have occasioned two milestones in their short history.
These milestones, both of a revolutionary nature, occurred on
the floor of the Chicago Mercantile Exchange. The first milestone
was their creation itself. The departure by traditional futures
from their century old agricultural base and entrance into the
world of finance dramatically changed their direction and history.
By definition, no financial futures history could have ensued
without its conceptual inception. It is clear today that the
revolutionary concept sponsored by the CME seventeen years ago,
was destined to change the world of finance and become an indispensable
risk management tool the world over. Indeed, the invention of
financial futures has been hailed by Merton H. Miller, PhD.,
Professor of Banking and Finance, University of Chicago, as "the
most significant financial innovation of the last twenty years."
hardly anyone recognized that event as significant back in 1972.
Indeed, hardly anyone believed it to be of any consequence at
all, and few gave it any chance of success. Pundits and critics
mocked the idea, regarding it as no more than a joke or, at best,
a quixotic impossible dream. Some simply thought it ludicrous
that a "bunch of pork belly crapshooters" would dare to contemplate
treading on the hallowed ground of foreign exchange. But succeed
we did. The reason? Quite simple! Victor Hugo explained it when
he told us that no general was smart enough and no army strong
enough to suppress an idea whose time had come.
second milestone—cash settlement—came nine years later. In 1981,
the Merc's Eurodollar contract became the first to settle by
way of payment in cash rather than by delivery of the instrument
itself. Once financial futures shed the requirement of physical
delivery, the curtain was opened to instruments and concepts
previously unthinkable. Cash settlement represented the gateway
to index products and seemingly limitless potential.
financial futures are poised at the threshold of their third
milestone. Not surprisingly, the CME is again leading the way.
As was the case in the with the first two instances, the third
has generated a good deal of discussion and even controversy.
For all the landmarks have a single common denominator; each
represent a dramatic departure from status quo. GLOBEX—the
third milestone—the automated global transaction system being
developed by the CME and Reuters Holdings PLC—represents a move
toward automation in the transaction process. It touches the
very nerve center of status quo in our industry and has incurred
the criticism of those who would oppose any movement toward change
in automation or adoption of technological advancements. To them,
such reforms advance the black box and hasten the end of open
unequivocal truth is that the world of futures is dynamic and
continuously evolving. Complacency is the enemy; innovation and
change are at the very heart of our success. As our markets'
applicability extended to new products, new techniques and new
users, as our markets became the standard tools for risk management,
the changes we engendered were dramatic and revolutionary.
1977, I wrote an article on the mechanics of a commodity futures
exchange for the Hofstra University Law Review. The article concluded
that an automated transaction process cannot supplant the trading
floor nor the open outcry system. While that assertion was made
with respect to a world quite different from today, GLOBEX does
not run contrary to this view. GLOBEX is not designed to replace
but rather to enhance the present transaction process. Nor did
my conclusions of a decade ago intimate that our industry should
ever be precluded from experimenting with change. Indeed, we
must continually evaluate the state of our industry in light
of current demands and competitive pressures on our markets,
and in recognition of the effects of scientific and technological
changes in the world around us.
is no doubt that throughout our dramatic metamorphosis and expansion,
one thing has remained constant. In the United States, open outcry
has been the liquidity engine for our success. This remains the
case. The CME, like all other American exchanges, has a continuing
commitment to the preservation of this transaction process. However,
the CME also believes that to blindly assume that open outcry
is the perfect system for all time is to be lulled into a false
sense of security and forgo any opportunities to strengthen or
advance our way of doing business. Such a policy would be both
foolish and dangerous and could lead to disaster. While we must
always respect our heritage, we must never let ourselves be held
back by its limitations. We must recognize the greater truth—that
those who ignore or fear to embrace reality will quickly become
history. Therein, of course, lies the rub.
Barbara Tuchman succinctly told us that "men will not believe
what does not fit in with their plans or suit their prearrangements." Walter
Wriston, the former Chairman of Citicorp, is more explicit: "When
major tides of change wash over the world," he tells us, "power
structures almost inevitably reject the notion that the world
really is changing, and they cling to their old beliefs."
change that has washed over our end of the world is the telecommunications
revolution: sophisticated satellites, micro-chips and fiber optics
changed the world from a confederation of autonomous financial
markets into one continuous marketplace. There is no longer a
distinct division of the three major time zones—Europe, North
America and the Far East. No longer are there three separate
markets operating independently of external pressures, maintaining
their own unique market centers, product lines, trading hours
and clientele. Today, news is distributed instantaneously across
all time zones and when such informational flows dictate market
action, financial managers no longer wait for local markets to
open before responding. The old order offered our financial markets
a geographical security blanket that kept them relatively free
from the dangers of international competition. That order is
history. Globalization, caused by the telecommunications revolution,
has ushered in the information standard. Every financial market
is now a potential competitor of the other. GLOBEX recognizes
and embodies that change. GLOBEX symbolizes the technological
revolution that has engulfed every walk of life—and none more
than ours. GLOBEX embraces reality and shakes the very foundations
of complacency about us. GLOBEX will change our industry forever.
And what's more, GLOBEX will extend its life.
additional observations. First, successful open outcry is a predominantly
American phenomenon. With few exceptions, other world centers
have not long had this tradition nor much success with its application.
As a consequence, many non-U.S. centers have, from the outset,
opted for either a partially or totally automated execution system.
Second, while the futures market pits remain the single most
important source of present-day liquidity, they are no longer
the only source. Today, there exists an army of upstairs traders
whose trading methodology is not dependent upon eye-to-eye pit
contact, but rather on two technological instruments: the computer-screen
and the telephone. Using these instruments, upstairs traders
buy and sell in rapid fashion throughout the day—similar to pit
traders—and provide a continuous flow of orders to the market.
These traders represent a liquidity source virtually nonexistent
a decade ago. While they will not, in the near future, replace
the liquidity source of pit traders, there is no denying that
they represent a growing universe with no visible limitation
on its expansion. GLOBEX should present no problem for the upstairs
CME perceived the globalization reality when it instituted the
mutual offset link with the Singapore International Monetary
Exchange (SIMEX) in 1984. It was the first successful attempt
to link the trading capability of two different markets in two
different time zones. It served as a model for others to follow
and took the world one step closer to a global market. This experiment
provided the CME with invaluable expertise and living proof that
world markets can be safely and efficiently linked. It also led
us to the next logical evolutionary step.
combines elements of electronic linkage and integrates them with
the open outcry system. In effect, it draws the best from the
present and marries it to the technology of the future. It is
critical to understand this point. We did not set out to re-create
open outcry. We sought a way to secure it—a way to marry it to
the technology of the future, a way to extend its market day—but
not to re-create it. While we recognized the value of open outcry
and the liquidity it generates, we sought to do better. We recognized
the inadequacies of open outcry—its inherent unfairness. We knew
that an automated system provided us an opportunity to do away
with those inadequacies, an opportunity to make the system more
the same time, GLOBEX represents a giant step toward unification
of the separate world financial centers. GLOBEX will offer the
world a transaction capability that is as advanced as the imagination
will allow and as far-reaching as the future itself; a transaction
capability that will allow the products of all the world's great
exchanges on the same system—on the same screen—to be utilized
by everyone around-the-clock. The very words are breathtaking.
envisioned a global, interactive, shared system for futures and
options. A system whereby no partner exchange will relinquish
its autonomy; whereby every partner exchange will continue to
clear and guarantee its own products; and whereby the rules of
the respective governments will continue in force, as before.
Yes, we envisioned a transaction structure for the ultimate unification
of the world's separate marketplaces. That is the essence of
is a major departure from status quo. Consequently, it has drawn
heavy criticism from those who fear change, as well as those
who recognize the competitive edge the new system will offer
our institution. Those are some of the very reasons the CME conceived
GLOBEX. Of course, there are no guarantees. There are many hurdles
to overcome, some in the government domain. Unfortunately, our
own government officials often fail to appreciate the prophet
in their own backyard. All too often, American innovations are
ignored or repressed by virtue of shallow reasoning or bureaucratic
red tape. Such examples are too numerous to mention. We trust,
however, that will not be the case with GLOBEX. We trust U.S.
federal officials will recognize that GLOBEX is the trail-blazer,
the model for all to follow; and, that it is a product of American
ingenuity to be assisted and encouraged.
Wriston says it well. "If today's leaders in government and
business fail to recognize that the world has changed" because
what they see, in Tuchman's words, `does not fit in with their
plans or suit their prearrangements' they will follow into oblivion
a long list of leaders who have made similar mistakes. Those
who can understand and master change will be tomorrow's winners."
first two milestones the CME engendered offer unequivocal proof
that our institution does understand change; that we are both
willing and capable of embracing the realities it represents.
The third milestone carries forward this tradition in a grand
by permission. Excerpted from Melamed on the Markets, by Leo
Melamed. John Wiley & Sons, 1993
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