Innovation in Financial Markets

Sunday December 19, 2021

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Welcome to What Happens Next.

My name is Larry Bernstein.

What Happens Next is a podcast where an expert is given just SIX minutes to present his argument. This is followed by a Q&A period for deeper engagement.

Today’s topic is managing new product development in futures trading and financial markets.

Our guest is Leo Melamed.

Leo is the retired Chairman of the Board of the Chicago Mercantile Exchange which is the largest futures trading exchange in the world.

Leo has an incredible personal story to tell. He was born in Bialystok, Poland, and his family escaped from the Nazis through a very circuitous route: first to Lithuania, then across Russia on the Trans-Siberian Railroad, and then to Japan before emigrating to Chicago. He was saved by a member of the Japanese consulate in Vilnius who provided visas to Jews in violation of his government’s policies.

Leo joined the CME as a young man and proceeded to take over its leadership. He led new product development and introduced futures on currencies, stocks, and interest rates. He also introduced cash settlement in lieu of physical delivery which really opened up the full gamut of possible index choices. Another critical innovation that Leo fought for was getting rid of open outcry and replacing it with electronic trading.

When Leo arrived at the CME, it was a downtrodden exchange focusing on butter and eggs. And those contracts are long gone and have been replaced with currency, S&P500 and Eurodollar interest rate futures which are the most heavily traded contracts in the world.

So, with that I turn to Leo Melamed, please begin your Six Minute Presentation.


Leo Melamed

Topic: Holocaust survivor leads the CME through new product development: introducing equity, currency, and interest rate futures, ending open outcry, and using cash settlement for indices
Bio: Former Chairman of the Board of the Chicago Mercantile Exchange.
Reading: Man of the Futures: The Story of Leo Melamed and the Birth of Modern Finance is here


I was seven years old when World War II began, and the Germans captured the city of Bialystok, Poland, where I was born. When they came to get my father, he was nowhere to be found. All they could do was beat up my mother and ransack our house. My father’s decision to run and later to have my mother grab me and take the last train out of Bialystok was heroic and unique. It began a miraculous escape which outwitted the Nazis and the KGB and took two years, spanned three continents, six languages, the Trans-Siberian Railroad and Japan, courtesy of a lifesaving transit visa from Japanese Consulate General, Chiune Sugihara.

We ended in Chicago. I grew up as an American kid and graduated from John Marshall Law School, became a lawyer. I successfully practiced for several years, but I didn’t love it.

Before law school I answered an ad from Merrill Lynch, Pierce, Fenner & Beane, thinking it was a law firm advertising for a runner. I took the job for $25 a week on the Chicago Mercantile Exchange floor. The instant I showed up on the Merc, I was smitten. I had found my destiny. At the time, the Merc was a downtrodden, total unlawful exchange with a terrible reputation, where its board of directors ruled for their own benefit. I became a leader in the membership and initiated a takeover. In 1969, I became the Merc Chairman. By then, I had immersed myself in futures trading and its true value in developing strong capital markets. In those days, the financial news was mostly about foreign exchange. The world was still operating under the Bretton Woods Fixed Exchange Rate System, where values in foreign exchange were determined by finance ministers.

I had become a hardened believer in the free market. My mentor, Milton Friedman, advocated the idea that value should be determined by supply and demand, not finance ministers. I began thinking about a futures market in currency. When I broached the idea to the Merc’s board of directors, they laughed me out of the room. “You are a lawyer, Mr. Melamed, not an economist. Futures are for agriculture. Soybeans, and pork bellies.” But I wondered, why? Was there an economic principal involved? My idea needed validation. I went to the great man, Milton Friedman. “It’s a wonderful idea,” he said, “Do it.” I was thrilled and gratified, but I needed it in writing. We agreed on a price of $5,000 for him to write a feasibility study.

I took that paper and ran with it. First, to our board of directors and then to every corner of the globe. It changed the world of finance. I went from currency futures to interest rates. 20 years later, Nobel laureate Merton Miller called financial futures the greatest invention of the past two decades. As an encore, I introduced cash settlement in place of physical delivery, bringing on S&P futures. Then I dared to transform open outcry to an electronic venue known as Globex. It seems so obvious today, but it was anything but. It gave us the ability in 2002 to go public and then to merge with our rival, the Chicago Board of Trade. Five years later, we were the largest exchange in the world. Our future lies in embracing technology and globalization and staying open to new ideas.

Leo Melamed QA

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