A Tribute to Leo Melamed - In Honor of
the Presentation of the 2005 CME Fred Arditti Innovation Award.
April 20, 2006
Myron S. Scholes
Nobel Prize Winning Economist
Leo Melamed is this years' recipient of the CME Fred Arditti Innovation
Award. A week before Fred Arditti passed away, he called me and
asked how this year's award selection was coming along. In no time
flat he steered the conversation to Leo Melamed as being the ideal
candidate. I had to bridle his enthusiasm and let him know that
the CME Competitive Markets Advisory Committee, had already decided
to select Leo for the award. We then went on to talk about ideas
and finance, and, in particular, his passion, the Chicago Mercantile
Exchange. Although that was the last time I would have the pleasure
to talk with Fred, I listened to many tributes to him at his memorial
service, and every year on this great occasion, we will be able
once again to honor Fred Arditti through making excellent award
One of the important responsibilities of the CME Competitive Markets
Committee (CMAC) is to select each year's recipient of the Fred
Arditti Innovation Award. The selection of this year's award winner
was unanimous. The outside members of the committee include Professors
Gary Becker, Jack Gould, Robert Merton, and Robert Schiller, and
David Hale and me a retired professor, an outsider and an insider
since I am on the CME board. Many committee members are in the
audience this evening. CMAC benefits tremendously by bringing together
this diverse group of independent thinkers to broaden our orientation.
easily recognized Leo Melamed as an innovator. He could define "innovation." An
innovator creates change by observing and anticipating customer
demands for products and services. An innovator realizes that
change is possible because of changes in infrastructure or institutions
such as computer or telecommunications technology, or new models
(ways of thinking), new understanding and because of chaotic
events. An innovator realizes that new products and services
can be produced profitably.
During the 1960s, Leo Melamed realized that the new customers
and products of the CME would be found in servicing the needs of
the financial sector and moved a moribund exchange for trading
storable commodities into a thriving global exchange with a diverse
product base. He was elected to the Board in 1967 and became its
Chairman in 1969.
He saw that the growth of the exchange depended on financial futures.
The shock and opportunity came in 1972 with the collapse of Brenton-Woods
agreements that culminated in the launch of the International Monetary
Market in 1972, with futures on financial currencies. An innovator
does not only dream of new products or services but also implements
them and sees the dream to fruition. As Tom Russo will tell us,
Leo Melamed worked tirelessly to convince regulators, governments,
and a new customer base of the efficacy and importance of financial
futures, including in addition to currencies, interest rate and
equity-based index futures. And, he directed the exchange to cement
the necessary regulatory approvals, licenses and support to enhance
the position of the exchange in making the dream come true.
To my chagrin, Merton Miller, my dear mentor at the University
of Chicago, anointed financial futures (and not options) as the
financial innovation of the twentieth century. And, Leo Melamed
is the father of financial futures. Leo has always agreed with
With financial futures, governments, corporations, financial entities,
and individual investors learned to transfer generalized risks
such as interest rate, or currency risk, and, as a result, enhanced
value for themselves and their clients. The products and services
offered by financial institutions changed as a result of their
new ability to transfer generalized risks. As former Chairman Greenspan
correctly pointed out, as the channels to transfer and hedge risks
in our global economy have expanded, our economy has become more
able to absorb shocks. Financial futures have become part of investor
Leo did stop innovating with financial futures as a great innovation.
He realized that computer and telecommunication technology would
allow for global trading in markets and allow the CME to expand
its offerings and build new products to serve an expanded client
base. Globex was born in 1987. This leap into electronic trading
required vision, perseverance, large cost, and an unbending faith
and a willingness to change how customers, and the exchange interacted
with each other, in addition, to how regulators viewed their role.
This is another crowing achievement.
Liquidity pools have always become central to the functioning
of an exchange. With Globex and the movement to electronic trading
that it fostered, liquidity pools no longer need be centralized
on the floor of the exchange. Bid-offer spreads have fallen dramatically
and with more efficient pricing the use of financial futures has
grown dramatically over the years.
On a personal note, I first met Leo in the late-70s, when the
CME was considering honoring Leo by funding a chair in finance
at the University of Chicago. Leo came to the University for lunch
and in his usual manner asked why the CME should fund such a chair.
Our response was that with financial futures our interests were
more aligned than with commodity futures. We too saw the growth
potential of financial futures.
I have become friends with Leo and Betty over the last number
of years. He is a nice guy to boot. He has a good sense of humor
and a warm heart. I am not sure we can say that about all innovators.
And, as a friend, I am privy to the way Leo thinks about financial
markets and the role of the exchange in those markets. Leo also
sees how globalization will change the way we trade. He is always
innovating. New products and services, new ways to use infrastructure
to add value for clients are always on his mind. We established
the CMAC to understand innovation and change or at least to anticipate
change. An innovator realizes that the old comfortable path might
not be the best. An innovator knows when to leave the path and
strikes out anew. I did not have the honor to be close to Leo in
the 70s and 80s, but I can well imagine the force of innovation.
I see it so clearly in him now. I expect that we might have to
honor him once again in ten years or so for his next innovations.
I am proud to honor Leo Meland as a recipient of the Fred Arditti
Innovation Award. In honoring him, as is always the case with regard
to Leo, he enhances the value of our award.
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