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October 27, 2002
Author: Terry Savage
Reprinted with permission.
TERRY SAVAGE TALKS MONEY WITH
Leo Melamed will go down in history as the father of financial futures.
From his ceaselessly inventive mind and his unshakable belief in
free markets, he has been the guiding force behind the Chicago Mercantile
Exchange's leadership in creating global financial markets.
On a personal level, I am among countless people inspired by Leo Melamed to
believe in our talents and in unlimited possibilities.
I first met Leo in the early 1970s, when I was a member and would-be floor
trader on the Merc's International Monetary Market, which Leo created.
He was one of the few who never questioned that a woman could make it on the
floor. And when television beckoned me, it was Leo whose reference assured
the TV honchos that my comments could be trusted.
Along the way I frequently turned to Leo, not only for his views on the markets
and the economy, but for insight into the future. When the market crashed
in 1987, and it was rumored that some firms might go under, dragging the
financial system into chaos, it was Leo who let me know that the Fed had
opened the money spigot to prevent disaster. The Fed chairman consulted with
Leo, as well!
So it was with great anticipation that I sat down with Leo Melamed, the Merc's
chairman emeritus, to discuss the current state of the markets--a conversation
that was frequently interrupted as he jumped to answer calls from the trading
floor, scanning the TV monitors as he bought and sold futures contracts.
The action reminded me that Leo is a long-term thinker--and a very short-term
I found here was a country that gives everybody this enormous
opportunity and the reason for this opportunity is that we have
a genuine free market," says Leo Melamed.
On the Merc
is a 100-year-old market, but 30 years ago we were still the little
in Chicago that traded stuff like pork bellies and eggs.
And from that we transformed ourselves into this giant global market that covers
the landscape of finance, and we still kept our agricultural products.
went into foreign exchange, interest rates futures, equity futures
and options. And
we launched the first electronic mechanism for trading called
work in July in the Standard & Poor's 500 Futures pit at the Merc
shortly after the opening bell. Leo Melamed says, "In the long
run, I think it's clear that electronics are going to rule the day,
and someday all the markets will be operated in an electronic venue." Electronic
trading provides efficiencies that open outcry doesn't and much lower
costs, Melamed says.
On open outcry
Melamed is widely credited for pushing the concept of electronic trading, even
as it threatened to displace the livelihood of the floor traders who make
their markets through open outcry and have always held the reins of power
at the exchange.
were the very first exchange to develop the idea of an electronic
trade futures, though by the time it was launched there were others
it. We had to go to the floor [for permission], and the floor knew that this
was the camel's nose under the tent. Our floor is a very educated group, very
smart people. But they also knew that what we were telling them was the truth.
We said, 'If this is the trend, don't we want to protect our franchise? Or do
we ignore reality and die?'
we got an 87 percent favorable vote to go ahead in 1987 with electronic
Now this represented Darth Vader walking down the street. Nevertheless
an enlightened membership voted in favor, knowing it had to do the right thing.
we said, 'We will make a deal. As long as open outcry pits continue
to be viable,
we will continue to support the pits, but we don't want this to
be a subjective test. We want this to be very, very objective. We will make a
formula on which you can agree, an objective test--so much volume and so much
open interest every year as a percentage of what the world trades in a given
product. If you can maintain those minimums, we will continue to support you.
But you've got to give us the right to do everything electronically we want to
do, list everything side by side, so we don't lose those customers that want
to do it electronically. Let the best man win, so to speak.'
the oddest thing has happened. Both markets have benefitted."
On the ultimate winner
the long run, I think it's clear that electronics are going to
rule the day, and
someday all the markets will be operated in an electronic venue.
But nobody knows when that's going to happen, and nobody knows which markets
are going to move there more quickly than other markets.
only one that can make that decision is the marketplace itself.
And so far, the
marketplace has decided that a lot of the users still like the open
outcry venue. As a matter of fact, that's the reason that our open outcry markets
have grown along with the growth in electronic trading.
believe the ultimate outcome is electronic. I mean, the efficiencies
are not comparable
to what open outcry can provide, and the costs are much reduced.
There's no doubt in the long run the electronic market will be the only market.
why not find a way in which to bring our members along. Some of
them don't care,
some are too old and won't change. We can't do anything about them.
But how about the 50 percent or greater factor of the younger members who can
transform themselves into an electronic broker or electronic trader?
we give them the tools, and we train them, and we spend some money
in doing it,
we will bring along those who want to come along. So that if, in
fact, the destiny is electronic, as I believe it will ultimately be, we will
have protected that resource, those members who are so expert, those members
that produce the liquidity that is so necessary to maintain the marketplace.
why we have created an electronic implementation committee doing
all kinds of
things in education and training to bring the pit broker into the
electronic age. It started just last May, but a year from now, you're going to
see those results. And I think it will be to the benefit of all those open outcry
On the new Merc
the Merc voted to "de-mutualize," to move from a member-owned,
not-for-profit organization to a for-profit business. And the Merc has filed
for an initial public offering of its shares in the next few months. Because
of the upcoming public offering, Melamed is restricted from commenting about
prospects for the future. But he does explain the forward-thinking change in
structure in a conceptual way.
meant we became a for-profit organization instead of a mutual membership
organization, and the board was given enormous new authority
to proceed on its own judgment, and to retain outside management, people who
hadn't necessarily been in the system a long time, but who know the marketplace,
and who can give us leadership in the new directions we have to take.
a very competitive environment for global market like ours, and
it often requires very
rapid action and quick decisions. A member organization requires
a political process that takes time for educating the membership. Prior to demutualization
we had 220 or 230 committees. We have about two dozen today."
There was another big reason for becoming a for-profit, shareholder-owned company.
know that to compete technologically, to make our Globex electronic
good as it gets in order to compete with Eurex and LiffeConnect,
that costs a lot of money! Technology is a very expensive thing!"
While Melamed couldn't comment on the IPO, the prospectus says the uses of
the cash to be raised will include outlays for new technology.
On single-stock futures
Melamed is wildly enthusiastic about the new product, futures on individual
stocks. Single-stock futures are scheduled to start trading in early November,
and several electronic exchanges have been formed to compete for market share.
It was a prospect that finally drove the Chicago exchanges to work together
to create OneChicago, an electronic exchange for single-stock futures.
knew we would face serious competition from Europe. LIFFE had
single-stock futures though they couldn't sell to Americans. Eurex
interested, the Amex was interested, as well as the Chicago Board Options Exchange,
the Board of Trade and NYMEX.
so here in Chicago evolved a kind of natural idea. We have both
sides of the street:
the CBOE expertise in options and single-stock options, and two
of the largest futures exchanges. So we already had the clientele, so to speak.
has refused to make its futures contracts "fungible" [interchangeable]
with those traded on other proposed exchanges such as the exchange created
by NasdaqLiffe markets. That means a contract bought on one exchange must be
sold there as well. The exchange with the most market share wins. Melamed is
very confident and very proprietary:
you spend the money and do all the innovations, and do the thought
create the liquidity, what the hell do you want to give it away
On the stock market
afraid I'm not a believer that the bottom has been seen. I believe
that the bubble
that was built in the '90s was of such magnitude that its bursting
is going to take a lot more of consequence than we've had.
may take another two to three years before all the negative effects
have been felt
in all sectors, and that hasn't yet happened.
my view is that there is still pain out there, and I wouldn't
get overly enthused
with the present market. That's not to say markets can't rally.
markets rally and certainly bear markets have many rallies in the course of their
Melamed's wisdom transcends the markets, but it's always based on a belief
in the free market. Here's what he's tried to teach his children and grandchildren.
you teach them is moral values, the right and wrong of things.
And a belief in
the free market. I believe that's basic to the success not only
this country, but an individual.
an individual really believes that his ideas and his career are
dependent on himself
or herself, then they can achieve. And in order to believe that,
have to believe in the free market.
can achieve in an economy or a country that's dictated by prescription
Because then your potential is totally limited by what somebody
else has prescribed for you.
a free nation, you write the prescription. Where do you want to
go? How much do
you want to earn? What do you want to be? You make those decisions.
And the marketplace will decide if you are right or wrong. But at least you have
On starting out
Without education there is no future. You have to be educated to compete, whether
in a job or as an entrepreneur.
Then, pick a niche. You can't be all things to everyone. Become an expert in
one thing, and concentrate on what you really know. It should be something
that fits your temperament and intellectual acumen. That's where you'll succeed.
I think you have to take some risk. It has to fit your temperament
But some risk is advisable at an early age. Risk taking will get harder as
the years go by. So if you're gonna do something that is a little--or a lot--risky
you'd better do it early, so that if it fails, you can pick yourself up and
start all over again--and still be a success at the end of the line.
that risk, and hopefully it will work out. But if it doesn't,
don't ever look
back in terms of 'I could have ... should have ... would have.'
life, at the time you make the decision, you have to believe that
it's the right
decision for that time, whether it turns out right or not. Don't
too hard on yourself if it doesn't work."
On America's future
always bullish on America. You talk to an immigrant, and you find
patriots on earth. This land saved our lives. While I came as a
little boy, I never forgot that.
I found here was a country that gives everybody this enormous
the reason for this opportunity is that we have a genuine free market.
Milton Friedman ideals have been instituted more so here than anywhere in the
world, and as a consequence this nation is more successful than any other in
throws daggers at us for all kinds of things, but if a vote were
today where most people want to live, you'd have a line around the
world coming here. So I can't be anything but a bull on America. Never mind the
ups and downs of the stock market, this land will prosper!"
Leo Melamed in a photo from October 1998.
Born in Poland, Leo Melamed and his parents fled the Nazis
in 1939 following the outbreak of World War II.
Miraculously, they outwitted both the Gestapo and the KGB as
they trekked across Europe and Siberia to Vladivostok, the Eastern
Russian seaport. As a result of a life-saving transit visa issued
by Chiune Sugihara, the Japanese Consul General to Lithuania,
the Melamdovich family left Russia and found safe haven in Japan.
In April 1941, they were admitted to the United States, and the family settled
in Chicago, where Melamed's parents worked as Yiddish school teachers for
the Sholem Aleichem Folks Institute.
Leo Melamed grew up on the Northwest Side of Chicago, attended Roosevelt High
School, where he met his future wife, Betty Sattler, and completed his undergraduate
studies at the University of Illinois at Chicago, and received his J.D. degree
from the John Marshall Law School in 1955.
The Melameds have three grown children, Idelle, Jordan and David.
Leo Melamed was a successful Chicago attorney for a number of years but maintained
part-time activities as a commodity futures trader. In 1965 he left the practice
of law to concentrate full-time on a futures trading career at the Chicago
Mercantile Exchange, where he conceived and created a futures market in financial
In 1972, Melamed's vision became reality when the International Monetary Market
was launched, recognized as one of the most significant financial innovations
of the 20th century.
Melamed has been an adviser to the Commodity Futures Trading Commission and
serves as special adviser on futures markets to governments worldwide.
He is the author of several books and monographs on financial markets; a science
fiction novel, The Tenth Planet, and his memoirs.
2002 Chicago Sun-Times, Inc.
Savage is a registered investment adviser and is on the board
of directors of McDonald's Corp. Send questions via e-mail to
Copyright 2002 Chicago Sun-Times, Inc.