On Thursday, October 23. Swedish Entrepreneurship Forum together with Nasdaq Stockholm arranged a seminar with Leo Melamed, the man who established Financial Futures, at Berns Salonger. The audience was told of how eight year old Leo Melamed came to the United States from Poland during World War II. He got an education, became a lawyer and by coincidence acquired a successful career in the financial business.
From Poland to Chicago
Leo Melamed was born in a Jewish family in 1932 in Poland and fled from the Nazis during the first year of World War II. The journey took them from Lithuania, through Russia via the Trans-Siberian Railway and onwards to Japan. A year later he and his family moved to the United States where he started school and his parents started working as teachers. As he became older, while studying for his lawyer degree, he worked extra for the CME Group developing the futures market. In 1965 he quit his job as a lawyer and was elected a member of CME’s board.
His first lesson in economics
Moving back in time, Leo Melamed, who established Financial Futures, told the story of when he received his first lesson in economics by his father. Being seven years old in Lithuania, his father held up one Lithuanian Lita and one Polish Zloty, and asked him “what are they worth?” They went to buy bread to find out.
– What I found out was that the only way to know is on the market. What can it buy, what is it worth?
Contacted Milton Friedman
Thirty years after his first lesson Melamed became Chairman of the Board at CME. He felt that the time was right for a market place for currency derivate. He presented his proposal for a number of actors on the financial market, but was laughed at. Melamed realized that what he needed was a source which no one would doubt, and therefore took contact with the economist Milton Freidman. They met at the Waldorf Astoria in New York where Leo presented his idea. Surprisingly, Friedman thought the idea of Financial Futures was great. Milton Friedman made a feasibility study that Melamed later used to persuade the US Head of Treasury, George P. Schultz, of the fact that it indeed was a good idea.
– If Milton Friedman says this is good for us, then I think it’s good for us, Schultz said.
The launch of Financial Futures
When CME Group launched Financial Futures as a financial instrument for buying property at a future date for a fixed prize; almost every magazine wrote that it was worthless. Twenty years later the critics was truly silenced once and for all as it was named the best invention in the modern era of finance.
– I couldn’t have been luckier, nor had better timing.
Melamed realized that the world was about to change, in particular how we communicate, and that the financial market would be effected by this transformation. Therefore, he launched the Eurodollar in 1981 (deposits denoted in US Dollar in banks outside the US) and in 1982 the Stock Index Futures.
– I kept on working with this for the next 20 years.
Electronic Transaction System
In 1987 Melamed arranged a meeting with Reuters, the largest communication corporation in the world, to discuss the creation of an electronic transaction system. The suggestion was not received well amongst the brokers who stood to lose large sums of money in commission if such system was introduced.
– I thought it would take five years to swap systems. The rest of the world understood that this was the future, but it was met with great resistance in the USA and electronic transactions did not take over as the main system until 2004.
The electronic system made the world market directly available all across the globe. The number of transactions in Globex increased from a few million a year to thirteen million a day. The record was broken on October 21, 2014 when fourteen million transactions were made in one single day. In October the American stock market also fell suddenly.
– What did the world do to handle this, when all financial instruments where effected? Well, they used Futures and derivate to offset the risk.
Derivate are a natural development of the financial market where the risk can be transferred to those who are more capable of handling it, Melamed told the audience. The financial progress is just part of an evolution that keeps on happening on several areas, an evolution that speeds up more and more.
– We cannot go back in time, we can only go forward.
To conclude the seminar, Melamed answered a question from the seminar’s moderator Magnus Billing, CEO at Nasdaq Stockholm. He wondered if there are any “tyrannies of status quo” in the future, and what we can do about them.
– I wish I could see into the future, but I can’t. What we do know is that there will always be status quo since people like what they already know.
About 70 percent of the inventions in the 20th century were made by Americans, Leo Melamed continued. This is due to the fact that risk taking is encouraged in the US. However, this will change in the future because of the possibilities that the internet brings.
– Internet democratized knowledge and information.
Today everyone have access to the same information, no matter where in the world they are. This equality in information will continue to drive innovation forward, Melamed concluded.