High Frequency Trading Review


    An interview with Leo Melamed

    In this interview for the High Frequency Trading Review, Mike O’Hara talks to Leo Melamed, financial market innovator, writer, lecturer and international authority on futures markets. Mr Melamed is recognized as the founder of financial futures and is Chairman Emeritus of the CME Group, Inc.

    HFT Review: Leo, welcome to the HFT Review. With such a long and distinguished career in the futures industry, you probably need no introduction to most of our readers. But for those who may not be familiar with your work, could you tell us who you are and what you’re currently working on, particularly anything relevant to HFT?

    Leo Melamed: I am Chairman of Strategic Steering at the Chicago Mercantile Exchange, so I look more at long range plans than at the immediate nature of trading. I’m presently concentrating on expanding our market presence into China and more generally into Asia, as well as into Eastern Europe. That’s my most focused area of responsibility at this time.

    HFTR: And electronic trading, computer-based trading, is presumably quite a large part of that?

    LM: Yes it is. We believe that our Globex system rivals anything in the world. So we try to get the nations that don’t have an electronic system capable of doing international trade to consider placing some of their contracts on our Globex system, which would give them international presence and of course it would expand our reach into that nation too.

    HFTR: And how open are these emerging, less developed markets to your approaches? Are there any particular challenges you encounter when pushing that agenda?

    LM: First of all, they are always open to anything that will educate them or give them a better understanding of how to compete in the world. But given we are the biggest futures market in the world, they are always a little bit concerned that we may try to “capture their independence”, and not let them gain from expansion. But that is certainly not our intent.

    Our record in Brazil, in Malaysia, in Korea, in Japan, shows clearly that we don’t try to dominate, we want to partner. To an extent, people understand that but it is a concern to them.

    HFTR: Exchanges have changed fundamentally during your career. For example, in the past the main purpose of a stock exchange was to list companies but now they now have all these different revenue streams from selling data, software, co-location and so on. How do you see exchanges evolving in the future?

    LM: You’re absolutely right, it’s quite different than I remember when I first was a trader on the floor, it’s really nothing like that anymore. We have an expansion of capabilities and market applications that we wouldn’t have dreamed of back then. And it’s not that long ago, we’re talking maybe two, three decades ago. The exchanges have morphed into much bigger entities doing so many more things than they did. Plus there was this whole period of consolidation that occurred in the last 15 years, which moved the markets together and made them bigger, but I think we may have reached the zenith in the consolidation efforts. The last few months or so has indicated we’ve reached a level of consolidation that has to be digested before we move forward.

    What I think will continue to happen is that exchanges will expand the reach of their systems and applications by partnering with other exchanges rather than trying to merge with them or take them over. The markets will be better off making partnerships in given areas of expertise that both marketplaces can capture. That will continue to happen because the world is getting smaller in that regard and there is a need for the emerging nations to find or embrace the applications that the mature markets have already achieved.

    Whether it’s European markets making some sort of in-road to the Middle East or to Eastern Europe, or American markets making in-roads and partnerships with Asian markets, I expect that to continue and that is going to be evident in the years to come.

    The other thing is the expansion and use of futures markets. I’m very bullish on that because we’re very innovative. Some markets like weather would have been a science fiction joke twenty years ago but not anymore; we now have weather futures.

    HFTR: Or even things like the VIX volatility index. Who would have thought of that twenty years ago?

    LM: Exactly right. The uses of futures markets are expanding, whether it’s going to be in employment indexes or health indexes for example. I think health is a major source of new market potential, whether it’s medicines that are good or bad, applications in treatment of cancer or other diseases; whether it be taxation, employment, job creation, health benefits – these are areas that we would not have thought futures markets could be applicable to, but they are becoming so and will continue to be.

    HFTR: So you’re saying that anything that has some sort of index or figure attached to it could have a futures market on it?

    LM: That’s exactly right. And that all happened when we broke the mould on cash settlement rather than on physical delivery. None of this would have been possible if we had to physically deliver at the maturity of the product involved. I once talked to General Poindexter who wanted a terrorist index. I asked him whether he wanted delivery of the terrorists… (laughs)

    HFTR: What, dead or alive?

    LM: It didn’t quite work. But anyway, what you can do is cash settle the values that change instead of taking delivery. That opened up markets to one’s imagination for creating all kinds of indexes as you point out, whether it’s a volatility index or whatever. And I think that’s going to continue to happen.

    HFTR: Let’s move on to the subject of high frequency trading. Earlier this year, you wrote an opinion piece in the Financial Times, “HFT cheetahs need to be protected from regulatory poachers”, which generated a fair amount of discussion in the blogosphere. Was that piece prompted by anything in particular? Do you think the markets are currently over-regulated?

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