INTERVIEW
On The Alliance Of Exchanges
Leo Melamed
by John Sweeney
Even though he is currently chairman and chief executive officer of the global futures organization Sakura Dellsher, Leo Melamed is best known as the chairman emeritus of the Chicago Mercantile Exchange (CME) and widely recognized as the founder of the concept of financial futures. As chairman of the CME, Melamed introduced foreign currency futures in 1972 with the launch of the International Monetary Market (IMM) -- the first futures market for financial instruments. Under 25 years of his leadership, the CME was transformed from a secondary domestic agricultural exchange to the world's foremost financial futures exchange. In January 1997, in his position as chairman emeritus, Melamed was appointed a permanent advisor to the board and executive committee of the CME.
As chief architect of financial futures, Melamed led the US futures industry from 1967 until his retirement from the CME in 1991. During this period, financial futures experienced unparalleled growth and became an established and indispensable tool in financial risk management. Further, in 1987, Melamed introduced Globex, the first electronic futures after-hours trading system, developed in conjunction with Reuters Holdings PLC. Melamed served as the first chairman of the system until 1993.
Melamed, an attorney by profession, is an active futures trader. Interim STOCKS & COMMODITIES Editor John Sweeney interviewed Melamed via telephone on October 11, 1999.
ILLUSTRATION BY CARL GREEN
So what's going on with the exchanges? What is going to happen to retail traders as the entire world gets into the exchange business?
Well, they'll tell you that the technology of recent years and the Internet are clearly a boon to the consumer.
They're not?
I think they are right. I think the consumer is the big beneficiary of all that has been happening. So the consumer, and in particular the retail trade, will have many more options in financial trading than he or she did before. Of course, some of those options will be the same as before, because many of the retail people just invest in funds, and those will continue to be managed by professionals. But the high end of the retail business will have a lot of other avenues for trade.
For example?
In our world -- certainly the futures world -- we have, over the last 20 years, gone from being very retail oriented in the agricultural markets to very institutionally oriented in the financial markets. Currently, in fact, our markets are almost 95% institutional in financial markets, if not more. We are at a point where we can change the course of that trend. And we are doing it.
What's an example? Can you tell us about the E-mini?
Two years ago, as you probably know, the Chicago Mercantile Exchange (CME) instituted the E-mini contract, which was designed specifically for the retail user. It has been a phenomenal success. It is even hard to describe its success because it is the most successful futures instrument that has ever been designed by the Merc or anybody else, for that matter. In the two years since, we have been averaging something like 50,000 trades per day and we have enormous open interest. Now it is all electronic, and that was what I personally pushed to test, to see if we could touch a universe that hadn't used futures before. In fact, we did. About 40% of that trade is retail business that we otherwise never would have had.
Forty percent? Really? What about futures on individual equities?
That's a difficult and important issue. We -- that is, the exchanges, the US exchanges -- are in the midst of a reauthorization process.
Explain that for our readers, please.
Reauthorization is a process required as a result of the Sunset Provision of the Commodity Exchange Act, in which the Commodity Futures Trading Commission (CFTC) regulatory authority has to be reviewed by Congress every two to three years. During the process, CFTC rules are subject to review. The current rules with respect to equities divide authority between the CFTC and the Securities Exchange Commission (SEC), according to the Shad-Johnson Accord.
We'll discuss that in a bit. Go on.
Well, the Shad-Johnson Accord came into existence about 17 years ago. That rule, along with many other rules that are now outdated, were established at the beginning of the CFTC organization.
In 1974?
That's right. Those markets in 1974 were geared primarily to protect the small trader, the small participants in futures. They have a lot of rules for protection purposes, but those rules don't make much sense anymore, what with the sophistication and the change in environment and the ongoing competition today.
One of those rules prevented futures markets from going into small-based indices.
What does the rule specifically state?
The Shad-Johnson Accord makes a distinction between broad-based equity indices that futures markets are allowed to trade, and narrow-based indices -- individual stock contracts -- that futures markets are not allowed to trade and are reserved for equity exchanges, like the Chicago Board Options Exchange (CBOE).
What has that done?
That distinction has prevented futures markets from competing in those instruments. There is no real good reason to make that distinction any more, because our markets can prevent manipulation or fraud now. Besides, we would gladly adopt whatever other principles the Securities and Exchange Commission (SEC) would demand in order to repeal the Shad-Johnson prohibition.
We feel -- and I am sure that we are in sync with many of the officials of the Federal Reserve as well as the Treasury -- that competition is healthy, and that kind of environment in turn has produced the best financial service sector in the world. Competition in this area will be beneficial to the consumer as well.
We will be totally connected through the Internet so that if someone wants to trade futures online, he will have a brokerage account that allows him to do so while he is doing something else at the same time. That is very nearby. -- Leo Melamed
Excerpted from an article originally published in the January 2000 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 1999, Technical Analysis, Inc.
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