A Tribute to Leo Melamed
In Honor of the Presentation of the
2005 CME Fred Arditti Innovation Award on April 20, 2006
Thomas A. Russo
Vice Chairman and Chief Legal Officer
When Leo Melamed asked me to spend a few minutes talking about
him here tonight, I was honored. I have known Leo since the early
1970's and, in that sense, already knew enough to talk at length
about his lifetime of accomplishments. I thought this would be
a pretty straightforward exercise for me to simply get up here
and tell you all about a great man. What I didn't realize, however,
is that as I reflected on this man and all that I have learned
from him, this would turn into a personal learning experience for
me - and in that sense, hopefully for all of you.
I went about the task of looking into Leo's life and, among other
things, reading his book, Escape to the Futures. I also spent three
hours with Leo and Henry Jarecki reminiscing about the past at
this year's Futures Industry Conference in Boca.
As I studied Leo's life, I realized that his is more than just
a fascinating story. His life is one to learn from. Therefore,
I am going to talk about not only what Leo has done in his life
so far, but also try to extrapolate from it some basic lessons
about creativity and innovation. Because, in terms of these two
concepts - creativity and innovation - Leo has set a standard for
how we should all approach our lives.
First, the basics. Leo was born in Bialystok, Poland in 1932.
He had barely begun the first grade, when in 1939, Leo and his
parents fled Poland to escape the onslaught of anti-Semitism that
already tore at their homeland from both the Nazis and the Russians.
Over 18 arduous months, Leo and his family outwitted and evaded
both the Gestapo and the KGB and made a long trek across Siberia,
only to arrive in Japan. After a brief stint in Japan, Leo's family
was on the move once again, and they came to the United States
in 1941 and settled in Chicago.
Leo went on
to attend law school at the John Marshall Law School in downtown
Chicago. During law school, he answered a classified ad for a
part-time job at what he mistakenly thought was a law firm called
Merrill, Lynch, Pierce, Fenner & Bean. Leo got
the offer and soon found himself on the floor of the Chicago Mercantile
Exchange. It was love at first sight.
Leo started out as a part-time runner, but he was a trader at
heart. He borrowed money from his dad to buy a seat on the exchange
while he was still in law school - an egg and onion trader by morning
and law student by night. Without going into all the details, let's
just say that the rest was history. Leo would eventually go on
to lead the Chicago Mercantile Exchange for a quarter of a century.
As a true visionary, Leo is widely credited with introducing
finance to an industry that had been dominated by agriculture.
For example, as Chairman of the CME in 1972, Leo created the International
Monetary Market, the first futures market for financial instruments,
and implemented the first successful futures contracts on foreign
exchange. Over the ensuing years, Leo continued to foster financial
innovation at the CME, introducing Treasury Bill futures, Eurodollar
futures and stock index futures. In 1987, Leo became the Founding
Chairman of GLOBEX - the world's first electronic futures trading
I could go on and on listing Leo's achievements, but hopefully
this is sufficient context to understand that tonight we are honoring
a true pioneer: a visionary, a financial genius and a bona fide
Now, I want to focus on some of the highlights of Leo's career
and try to extrapolate some lessons for our own careers and lives.
start with currency futures. As Leo explains it, the idea of
having a futures market in foreign exchange did not "come
all at once." There was no "eureka" moment for the idea.
As background, Leo had studied the Bretton Woods accord, which
was named for the small town in New Hampshire where delegates of
the Allied nations met and deliberated over the post World War
II economic order. The Bretton Woods accord, in effect, tied the
world's major currencies to the US dollar, and the dollar in turn,
was pegged to the price of gold at $35 an ounce.
Leo had also
read the works of Milton Friedman - an economist, who would have
a dramatic impact on Leo's life. Friedman thought that the Bretton
Woods system "was archaic and had to be replaced
with [a] currency float." Leo's thought was very simple. If Bretton
Woods were to fall, then currency futures would work.
the only one who had the idea of a futures contract on currency.
The International Commerce Exchange (ICE), the old Produce Exchange
in New York, began offering futures on currencies in April 1970.
However, the contract did not go over well. It was more of a
forward contract. In addition, it came at a time when the Bretton
Woods agreement was still in force, so there was no price movement
in the market. Quoting Leo, he wrote of ICE: "The
ICE was no test for what I had in mind. Its idea was more of a
forward currency exchange than the financial futures market I thought
was possible. Theirs was the wrong contract, with the wrong specifications,
initiated in the wrong manner, at the wrong time."
As you can tell from that quote, I don't think Leo particularly
liked the contract. What is interesting was that independent of
one another, both ICE and Leo were thinking about the same thing.
This is not so different from when Alexander Graham Bell and Elisha
Gray, at about the same time, each independently invented the telephone.
A vital step in this evolution occurred on August 15, 1971, when
President Nixon shocked the international finance community and
announced that the US would no longer keep its promise to exchange
US dollars for gold. With a record balance of payments deficit
and declining US gold coverage of foreign reserves, President Nixon
had no choice. Finally, on December 13, 1971, the leading industrial
nations met in Washington, DC and came up with a new agreement
to replace Bretton Woods. While this agreement too would fail,
it allowed the major currencies to fluctuate more broadly against
the dollar. The march to the end of fixed exchange rates had begun.
With all of
this happening in the background, Leo decided that he needed
some credibility for his ideas. Therefore, he approached Milton
Friedman in November 1971 and asked if he would write a paper
on what he thought about opening a foreign exchange futures market.
Friedman agreed to write the paper, requesting $5,000 for his
work, making it what is probably the best investment the CME
has ever made. Friedman delivered his paper entitled "The Need
for Futures Markets in Currencies" on Monday, December 21, 1971
- this was one week after the December 13 decision to abandon Bretton
Leo realized that the new contract would need a place to trade
where it could thrive, and for this he envisioned a separate exchange.
Thus, the concept for the International Monetary Market or IMM
was hatched. On January 17, 1972, the Merc Board voted to make
the IMM a separate exchange by a vote of 321 to 19. Initial seats
for non-Merc members were set at a price of only $10,000 and by
the end of the year, 150 seats would be sold. Leo thought that
he had to get some new blood to trade the new contracts, so he
set the initial offering of new seats at this low price. Leo also
knew that he needed his new traders to be full-time traders in
the foreign currency market and not be running around from one
pit to another. As for Merc members, they would get access to the
IMM for a mere $100. Leo knew right from the beginning that the
name of the game would be liquidity, and he strategically set up
the best mechanism to make that happen.
He also went around courting several of the larger wire houses
and found some success, though many of the large brokerage houses
did not want to participate.
Leo also had a law degree. He thought instinctively that somebody
would probably need to approve this new contract. He sought legal
advice at the Merc, and they advised him that he did not need
approval and therefore tried to dissuade him from seeking it.
Notwithstanding the advice of counsel, Leo decided to move forward
with his plan to get somebody to approve the contract. Leo knew
that even if he did not need approval from a legal standpoint
(and, apparently, his lawyers were right that there was no such
requirement), formal "approval" would give the IMM credibility.
So Leo went
off to Washington, DC. He set up a meeting with George Shultz,
who would become the Treasury Secretary shortly after the IMM
launched. Shultz was a big believer in Milton Friedman, who had
been a colleague of his at the University of Chicago. Before
his meeting with Shultz, Leo arranged for Shultz to receive a
pre-meeting call from Friedman to discuss the concept. After
the meeting, Shultz simply said that he knew all about Leo and, "If it's good enough
for Milton, it's good enough for me." Leo also met with Arthur
Burns, the Chairman of the Federal Reserve, and Herb Stein, the
Chairman of the Council of Economic Advisers. They both said, "Godspeed."
On May 16,
1972, the IMM opened and the world of financial futures, which
we all consider commonplace today, began. Leo knew that the best
way to teach was by example. On opening day, he was in the pit
trading and putting his money where his mouth was. Unfortunately
for him, he shorted ten Swiss franc contracts and the dollar went
into a freefall. Since the franc was limit up for a period of days,
Leo, who had created the product, ironically lost a substantial
amount of money in the beginning. I guess this was Leo's way of
giving back. Leo's friends, of course, responded to his call. For
example, my good friend and Leo's good friend, Henry Jarecki, who
is here tonight, delivered on a promise to "make markets" and indeed
executed the first Mexican peso contract to be supportive of Leo.
There are two other noteworthy events that I will speak about
briefly before getting to GLOBEX. The problem with Leo is that
each of the major topics of his life is so enormous in scope, important
in consequence and innovative in character, that it would take
an entire book - much less a speech - to develop properly.
Leo knew from the get-go that there was going to be a world of
interest-rate futures. Therefore, the Merc, through Leo, introduced
the first short-term interest rate future on the T-bill. At that
time, I was at the CFTC, and I watched and participated in this
development. I vividly remember the fights with the SEC and the
nitty-gritty of our discussions. For example, the lawyers were
worried about the exclusive jurisdiction section of the Commodities
Exchange Act and how it applied to the T-bill. Leo, however, had
to worry about the more basic thing, namely: What would the Treasury
Department think of having futures contracts on one of its instruments?
Leo spoke with Bill Bagley, the Chairman of the CFTC, who suggested
a visit to the then Secretary of Treasury, Bill Simon. Sandy
Weill, who was the chief of Shearson & Company
at the time, made the introduction to Simon. In fact, Sandy agreed
to go to the meeting. Leo, who knew a working strategy when he
saw one, also asked Milton Friedman for help again. Once again,
Friedman called ahead of Leo's meeting. When Leo and Sandy showed
up for the meeting, Simon was already so impressed that he said, "Where
do you want me to sign?"
Leo also met
with industry leaders including Billy Salomon of Salomon Brothers.
Billy had made a staged whisper to Tom Strauss, executive vice
president at Salomon, who was with Billy, to "get
these _______ guys out of my office." After the T-bill futures
began doing well, Salomon Brothers called Leo and asked if it was
too late to join and trade. The answer of course was that it was
not too late, and Salomon Brothers became one of the biggest traders.
futures contract is another innovation that came to the Chicago
Mercantile Exchange under Leo's leadership. He lobbied for it,
and he negotiated to get it. Today, trading index futures has
become commonplace. But rather than drilling down on more products
such as index futures, I want to go into another innovative concept,
that of computerized trading.
In a 1977 edition of the Hofstra University Law Review, Leo Melamed
wrote a piece praising the open outcry system. Coincidentally,
in that same edition, I wrote an article explaining the importance
of the exclusive jurisdiction section of the Commodity Exchange
Act. There is no doubt that Leo was a proponent of the open outcry
system, as was virtually every trader on the floor of the Chicago
Mercantile Exchange. However, Leo recognized that a technological
revolution was fostering globalization and a fundamental change
in financial markets around the world. Leo chaired the Merc's Strategic
Planning Committee and decided to make its top priority finding
the answer to the effects of globalization.
At that time,
the Chicago Board of Trade was dealing with the same topic. The
CBOT decided to extend trading hours with an evening session
under the open outcry system. While no futures exchange had yet
taken major steps in the field of automation, the New York Stock
Exchange was making some progress. In 1976, it launched the DOT
(Designed Order Turnaround) system, followed by the Super-DOT
system in 1984. INTEX, an international electronic order matching
system for futures products, was also announced in 1984. Finally,
in 1986, the London Stock Exchange closed its trading floor in
favor of an automatic stock quotation system - this was known as
the "Big Bang." Meanwhile, Leo was writing his first book of fiction,
The Tenth Planet, which was ultimately published in 1987. Writing
proved to not only be perfect therapy for pressures in the market
but, more important, it kept him technologically current. In fact,
Leo started writing that book in pen and finished it on a laptop.
Leo knew that
it would be hard to sell the floor anything dealing with a "black box." However,
he thought that it might be possible to sell them the concept
of trading through a computer after the market closed. By doing
this, they wouldn't be threatened, and yet the camel's nose would
be under the tent.
Leo needed to find a firm with the technological expertise to
work on the system. Reuters was a logical choice since it had already
purchased Instinet, an order matching system for stocks, and had
introduced a system for foreign exchange. Reuters proved to be
a willing participant in developing GLOBEX.
A humorous aside of all of this was that the original name for
GLOBEX was PMT which stood for Post-Market-Trade. The name was
chosen to make it clear that the market was going to be post or
after the trading on the exchange. It was only after naming the
new system, PMT, that Leo learned that the acronym had another
meaning. When he was in the United Kingdom, he saw a sign advertising
PMT. Ecstatic, he thought it was remarkable that this new concept
had already made it into an advertisement in the UK. However, when
he learned that the three letters also stood for premenstrual tension,
the name got changed and, thus, we have GLOBEX (Global Exchange).
1987, the Chicago Mercantile Exchange membership overwhelmingly
approved the concept for GLOBEX. In Leo's words, "It was the first
embrace of an electronic screen-based system for futures anywhere
in the world." Following the GLOBEX announcement, many other exchanges
around the world followed suit, with their own electronic systems
that would either extend existing trading hours or conduct the
entire transaction process. Yet, GLOBEX had a long way to go before
launching. Implementation proved challenging and it had to suffer
through some bad times, such as the market correction of 1987.
Ultimately, however, GLOBEX proved to be not only an innovation
that changed the landscape of the financial services industry,
but also an enormous success.
In 1995, Leo
wrote, "Financial markets [had] become virtually
unencumbered, continuous and worldwide. A company located anywhere
in the world, can use resources located anywhere in the world,
to produce a product anywhere in the world, to be sold anywhere
in the world." That statement could easily have come from Thomas
Friedman's 2005 book, The World is Flat, but it came from Leo,
a decade earlier. More to the point, Leo also wrote in 1995, "Suddenly,
every country on the planet is a competitor in the global marketplace."
When he talked
about the use of new products and new ways of trading by using
a computer, he stated that, "Risk management implicitly
must include risk enlightenment." He said in 1995:
has not seen the handwriting on the wall is blind to the reality
of our times. One can no more deny the fact that technology has
and will continue to engulf every aspect of financial markets
than one can restrict the use of derivatives in the management
of risk. The markets of the future will be automated. The traders
of the future will trade by way of the screen. Those who dare to
ignore this reality face extinction."
Leo did state at the time that while he did "not advocate turning
the lights off on existing trading floors," which he said "would
be unforgivably stupid - it is equally suicidal not to seriously
prepare for the technological tomorrow." He talked in 1995 about
satellites soon allowing wireless communication anywhere on the
planet. He also talked about the transfer of information "over
thin air." I am sure that, with the Blackberry in mind, he stated
in 1995, "The new technology will create a world which will result
in not just a series of new technological marvels, but in spectacular
Finally, he stated in that same year:
take heed! Complacency is the enemy. Tomorrow's futures traders
grew up with Nintendo and Sega. They were given a keyboard for
their fifth birthday; their homework was done on a computer;
their recreation time was spent in video centers; the World Wide
Web is their playground; Cyberspeak is their language."
He made these statements before they were as self-evident as
they are today. He was then in 1995, he was before then and is
now, a man of the future - a man with an eye for the future and
the energy, confidence and wisdom to get us all there.
And what lessons have we learned from all of this? We obviously
learned the lesson that we should be very happy and proud to know
a man such as Leo Melamed. I have had that good fortune for decades.
In learning about his life, you have a few key takeaways:
* A man of poor means but high goals can achieve anything.
* When you have a good idea, you have to do something about it.
It is not good enough to merely state it.
* Implementation of an idea is as important as the idea itself.
The person with the idea won't necessarily be the same one who
succeeds in implementation. The example of ICE, the former Produce
Exchange, is a good case in point. The fact that ICE may have been
first didn't mean that it would capture the market.
* Implementation includes the physical facilities where the idea
has to see its fruition. To do this, you might have to think out
of the box. The IMM was exactly that. It was a nexus to the old
world of agriculture, together with a vehicle to get new blood
into an industry. The creation of the IMM itself was pure genius.
It permitted an entire industry to get into the new world of financial
futures in a way that assured the greatest likelihood of success.
comes not just from the product itself, but from others who can
lend it validity. When Leo visited Arthur Burns, George Shultz,
Bill Simon, and a host of others, he did so not just for approval,
but perhaps more important, he did so to gain credibility for
these ideas. He wanted the world to know that the very people
whose jobs are to protect the country's financial integrity,
had no problem with his product or market, but in fact had, encouraged
the ideas. Leo didn't sit back and say, "Legally it is okay, that's
enough." He looked beyond the law into the ingredients of what
makes people believe in something and acted accordingly.
* All markets have a starting point and a trading point. In the
securities markets, the starting point is the public offering;
the trading point is the secondary market. In futures, the starting
point was the idea such as foreign currency futures, the trading
points were the liquidity providers. Leo not only got the floor
involved through the ingenious approach around new memberships
to the IMM, but he also got the outside world involved by talking
to the major firms, major banks and major central banks. Leo wanted
to make them all knowledgeable about the product, knowing that
if he could create liquidity, the players would know enough to
be able and want to participate. The energy that he had in marketing
a concept before the first trade was an important ingredient in
the innovation of each product.
* Do not be
afraid of your idea. When Leo had the idea for GLOBEX, he didn't
just say, "How could I possibly convince a floor-oriented
exchange to get into the world of tomorrow?" This is a man who
wrote about the benefits of floor trading, who was a floor trader,
and yet he was able to go outside of his environment, outside of
his constituency, and promote an idea whose time had not yet come.
He was not afraid of his idea because he was not intimidated by
his environment. Rather he used his environment and the credibility
that he had gotten from it to convince a floor that the future
would not be theirs without change. GLOBEX, which could have been
a hard sell by any stretch, got the overwhelming approval of the
Chicago Mercantile Exchange because one man was able to convince
them that it was in their own self-interest, even though all of
their instincts might have gone the other way.
I want to
close with a poem that Leo wrote on the IMM's 10th anniversary
entitled, "Who Were We!"
Who were we?
We were a bunch of guys who were hungry.
We were traders to whom it did not matter -
whether it was eggs or gold, bellies or
the British pound, turkeys or T-bills.
We were babes in the woods, innocents,
in a world we did not understand,
too dumb to be scared...
That the odds against us were too high;
That the banks would never trust us;
That the government would never let us;
That Chicago was the wrong place.
Well, here we are in 2006, and what did turn out to be the case?
Chicago was the right place because Leo was the right person. And
- not too dumb to be scared, but too smart to back down - too confident
to give up - who saw the future and, most remarkably, made it happen
against all odds. And - as a result, changed the culture - changed
an industry - and made a lasting mark for which an exchange, a
city, and a country should forever be indebted.
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