FINANCIAL FUTURES IN THE NEW WORLD ORDER

Presented at the 3rd Annual Tokyo International Finance Symposium,
Tokyo, Japan,
May 23, 1991.

To appreciate the new world order that dawned with the last decade of the 20th Century, it is necessary to understand the fundamental cause that induced all the revolutionary changes. More than any other single influence, the telecommunications revolution was the catalyst.

Modern communications penetrated every sphere of society in total disregard of geographical boundaries, economic principles, or political systems. It offered a stark uncompromising comparison of economic and political realities around the globe and became the common denominator of all the recent world upheavals.

It is also important to understand that the same common denominator is—and will continue to be—the single greatest influence on markets within the new world order. Telecommunications will continue to dictate globalization and a 24-hour market regime. Those who dare ignore this march of technology will cease to be competitive.

On November 9, 1989, twenty-six years after President John F. Kennedy stood at the Berlin Wall and shouted, "Ich bin ein Berliner," hundreds of thousands of East Germans began pouring with impunity through the Berlin Wall. The unbelievable had occurred without a shot being fired. The Berlin Wall had fallen. President Kennedy's historic pledge was no longer a symbolic gesture. The unification of Germany was soon to be a reality.

A continent away, on February 18, 1990, at the Victor Verster Prison Farm, an event transpired that South Africa's blacks had spent twenty-seven years praying for and many whites had spent just as long dreading. On that day Nelson Mandela emerged from the prison gates, raised both fists in the air, and climbed into a waiting car, a free man. The inevitable followed. A sea of changes which will inexorably lead to the abolishment of all forms Apartheid. President F.W. de Klerk summed it all up correctly as "the historic turning point in the history of South Africa."

At almost the same moment but a continent away, another earth-shattering eventuality was unfolding. It was May 1, 1990, and it seemed like just another traditional May Day celebration in Moscow's Red Square. As usual, all the government top brass were present, there were banners and marches and songs, and there was all the expected pomp and circumstance. But something was drastically different. The banner's colors were right—yellow letters on a red background—but the message was all wrong. "Communists: have no illusions—you are bankrupt," it blatantly proclaimed! Right there, in the middle of Red Square on May Day.

On January 16, 1991, less than a year later, President George Bush announced from the White House that "In conjunction with our coalition partners, the United States has moved ... to enforce the mandates of the United Nations Security Council. As of 7 o'clock p.m., Operation Desert Storm forces were engaging targets in Iraq and Kuwait." Thirty-seven days later, by virtue of a coalition of multi-national forces and the unqualified support of all free nations, the war was over. The Middle East, perhaps the world, will never be the same.

The foregoing four separate world occurrences are unequivocal evidence that the world changed quite profoundly during the past twenty-four months. Indeed, these events will have an incalculable impact on human history and, as President George Bush suggests, represent a new world order. But are these four incredible events of the last two years independent of each other? Are they isolated phenomenon, or is there a common denominator that ties them together?

The significance of the May Day parade and its disruptive banner—that this incredible event occurred and that it occurred without fear of retribution—is first and foremost vivid and commanding testimony of the failure of Communism. Conversely, it represents the magnificent triumph of capitalism, democracy, market-driven economic order, and of Adam Smith, Ayn Rand, Milton Friedman, and Merton Miller.

The Cold War is at an end. Communism has failed. Eastern European nations are newly liberated. Germany is unified. South Africa has finally moved to enter the Twentieth Century. And the Gulf War—at a minimum—will force the next would-be-dictator to reconsider any attempts to extend by force his tyranny unto a neighbor.

Are these events independent of each other? Are they isolated phenomenon without connection? Of course not. The evidence is unequivocal: there is a strong common thread between all the cataclysmic happenings of the last twenty-four months, a thread that has formed the cloth of the new world order.

To Alan Greenspan, Chairman of the U.S. Federal Reserve, most of what happened in the Soviet Union was pure economics. And surely there is a ring of truth to what he suggests: "It is almost as if a great experiment was conducted beginning some seventy years before. The world was divided into two parts. In one part, a market-driven economy based on the free forces of supply and demand; on the other a centrally planned economic order based on the edicts of government. Today we can compare the results. They are, of course, stunning. On one side, a standard of living so high it was unimaginable when the experiment began, on the other side economic bankruptcy."

The Red Square banner is testimony to still another truth, one that has even greater implications to the new world order. While the failure of Communism is not news—it failed long before the autumn of 1989—what is news is that the populations hostage to this economic and political order suddenly had the temerity and courage to publicly denounce the system that had enslaved them; that the truth about the economic failure of that system, officially kept secret within a world isolated by an iron curtain, was out. Unquestionably, economic forces were fundamental to the revolution that transpired within the Soviet Union. Unquestionably, Andrei Sakharov, Mikhail Gorbachev, Lech Walesa, Boris Yeltsin, and many others deserve a substantial measure of the credit. These giants of human history forged a political environment that made the events of 1989 possible. However, their monumental achievement was not conceivable without the parallel consequence of yet another human endeavor: the inexorable march of technology. While this has been stated before many times and in many ways, it bears repeating: those who ignore the march of technology will soon be history.

The telecommunications revolution—more than any other single factor—made it impossible to continue the charade and hide the unmitigated bankruptcy of the Communist order. Modern communications techniques, coupled with massive media penetration in disregard of national boundaries, offered a stark, uncompromising comparison of economic systems. As celebrated journalist David Halberstam states in his book, The Next Century, "It is increasingly difficult to censor thought in an age of sophisticated electronic media. Modern communications inevitably define modern conscience and speed across national borders. The oppressed can call attention not merely to the iniquities. . .but also to the price of such tyranny."

This leads us to the inevitable conclusion that the common denominator of the world upheavals of the past twenty-four months was the technological revolution of the past several decades. Modern telecommunications provided world citizens the ability to judge their governments, compare economic systems, examine moral codes, scrutinize cultural freedoms, and weigh them against that of their neighbors. No government could any longer hide the truth from its people. Clearly then, the technological revolution of the last decades made perestroika inevitable and brought the end of the communist regime. By the same logic and as a consequence of the same force of information flows, the telecommunications revolution brought down the Berlin Wall and was the pivotal force that caused the immoral walls of apartheid to crumble.

And if technology was a fundamental factor in assisting half the world to break its chains of tyranny, was not technology the single fundamental factor that made the Gulf War different from every other war: high-tech weaponry, Tomahawk sea-launched cruise missiles, Patriot anti-missile missiles, F-117 Stealth fighter-bombers, laser guns to spot targets, missiles that can take a 90 degree angle to find their target, vision devices that turn night into day, and listening gadgets that read the enemy's every radio transmission. What nation could afford to duplicate, develop, or keep current with this high-tech weaponry? With the Soviet Union bankrupt, with capital scarce and in demand around the world, with high technology so costly, would it be so far-fetched to muse that, perhaps, no nation would be able to match this might, and as a consequence make major wars obsolete for the foreseeable future of mankind.

As it has throughout the history of man, technology again is dictating fundamental and revolutionary change in our social structure and reshaping the political and economic landscape of our planet. Its immediate impact on the populations of Eastern Europe and the Middle East is now an historical reality. However, the effects of the information revolution reach far beyond social and political change. As Dr. Carver Mead of the California Institute of Technology points out: "The entire Industrial Revolution enhanced productivity by a factor of about a hundred, but the microelectronic revolution has already enhanced productivity in information-based technology by a factor of more than a million—and the end isn't in sight yet." Clearly, the consequences of the telecommunications revolution will be felt in every facet and niche of civilized life, and will dramatically change the nature and structure of financial markets.

We live in one inter-related, inter-dependent world economy without a distinct division of the three major time zones. Today's financial markets are continuous, worldwide in scope, ignoring geographic boundaries and time of day. Today, as Walter Wriston told us, by virtue of the information revolution "we are witnessing a galloping new system of international finance...one that differs radically from its precursors" in that, it "was not built by politicians, economists, central bankers or finance ministers...it was built by technology...by men and women who interconnected the planet with telecommunications and computers..." The consequences are not only global but regional as well. It can affect public and private financial policy objectives. That is good news for futures and options markets.

The experiment Alan Greenspan described was tangentially a triumph for the markets of futures and options. These markets are integral and indispensable to our market-driven economic order. Indeed, what markets better epitomize price determination by virtue of the free forces of supply and demand than do the markets of futures and options?

The markets of futures and options were the first to read the handwriting on the wall and discern the meaning and the potential of the forthcoming technological standard. The financial futures revolution—launched in Chicago in 1972—blazed the trail for much of what has since followed in world capital markets. It established there was a need for a new genre of risk management tools responsive to institutional money management and modern telecommunication technology, it induced the introduction of risk management as a regime, it led to the acceptance and integration of futures and options within the infrastructure of the financial establishment, and it became the catalyst for the development of futures markets worldwide. Thus, University of Chicago Professor Merton Miller, the 1990 Nobel laureate in Economics, nominated financial futures as "the most important financial innovation of the last two decades."

It is the necessity of risk management in a highly technological world that will have the greatest impact on the use and expansion of futures and options markets in the new world order. As a result of more globalization, greater interdependence, instant informational flows, immediate access to markets of choice, more sophisticated techniques, and intensified competition, the management of risk is bound to be at the core of every prudent long-range financial strategy. Indeed, our markets are ideally suited for a world where financial risk is constant, where financial volatility is commonplace, where innovation and competition will intensify, where demand for tailored risk management strategies will increase, where opportunities will rapidly appear and disappear on a constantly changing financial horizon, and where professional management will continue to demand efficient instruments of trade that serve their needs on a global and continuous basis. These are features that are fundamental to the instruments of futures and options.

Futures markets—from beans to bonds, from cattle to crude, from stocks to silver, from euros to yen, from coffee to the CPI—offer a measure of liquidity difficult to duplicate, a cost-efficiency of incomparable narrow bid/ask spreads, an ability to swiftly institute a variety of strategies, programs, or fine-tuning techniques, the ability to cost-effectively adjust portfolio exposure by moving back and forth between securities and cash, a flexibility to choose between the most fairly priced alternative instrument at any time, a facility to preserve credit lines within a system offering the highest degree of credit-worthiness, a fluency to access all markets on a global basis, a speed and certainty of execution of the highest magnitude, and soon will offer market coverage on a 24-hour basis. The foregoing represent a uniquely impressive array of components in the arsenal of tools imperative for the financial manager in the new world order.

True to their tradition, futures markets have again blazed the technological trail. The new world order—as an unyielding consequence of the telecommunications revolution—will unquestionably include automated electronic systems for the execution of futures and options as well as for every other form of financial medium including stocks, securities, options, and cash market instruments.

GLOBEX represents the logical extension of the financial futures revolution. The GLOBEX concept is inevitable. It is the only realistic response to the demands for an efficient and cost-effective capability for managing risk on a global basis. GLOBEX will integrate the open outcry sessions of the regular business day with state-of-the-art computer-generated screen technology. It will offer the world a 24-hour risk management regime that will facilitate competitive prices, a centralized marketplace, access, and a continuous flow of price information to the public. It represents the avant garde of the financial services arena and the precursor of market systems that will serve every segment of the new world order.

With the recent agreement between the CME and CBOT to unify their separate after-hours electronic trading systems, and with the MATIF already a member of the same system, GLOBEX should become the premier international futures and options trading mechanism. Ultimately, GLOBEX envisions linkage with all other world markets, affording all markets the capability to present their unique product lines to the international trading arena.

Financial futures are not a panacea, nor is the new world order free from the possibility of serious economic storms ahead. The Soviet Union is in chaos, the economic repercussions stemming from the German unification cannot be underestimated, the ramifications resulting from economic woes of emerging East-European nations will be serious, the monumental debt in the American economy is of critical significance, and the U.S. recession is not yet over. Whatever lies ahead, the markets of futures and options are prepared to play an important role in the new world order. Not only were they an essential ingredient in the economic revolution that recently swept over Eastern Europe and the Soviet Union, not only are they a quintessential component of any successful future global economic system, not only are they invaluable in times of upheaval and uncertainty such as may lie before us, they are in synch with the inexorable march of technology—a force that has been the common denominator and pivotal catalyst of change throughout the history of mankind.

Reprinted by permission. Excerpted from Melamed on the Markets, by Leo Melamed. John Wiley & Sons, 1993

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