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Cmemagazine Premiere

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Probability approach wins big for John Henry in trading and baseball

JOHN W. HENRY Founder, JWH Inc. Owner, Boston Red Sox

page 23

page 30


It’s easy to spot the
A leader looks the part. And with more than 25 million in open interest positions and an average daily volume of 2 million contracts, nothing comes close to CME Eurodollar futures and options on futures. With more than 83% of CME Eurodollar futures trading electronically on the CME Globex® platform, portfolio managers can hedge short term interest rate risk with a variety of trading strategies, like Butterflies and Packs and Bundles – around the clock from around the world.


CME, Globex, the globe logo and Chicago Mercantile Exchange are trademarks of CME.


Welcome to CME Magazine


CME Magazine will offer insights into CME’s markets and feature examples of how customers are using our products and services to successfully meet their evolving hedging and investment needs. Designed to be published several times a year, it will showcase the innovations that help make us a truly global exchange and that are improving the way markets work for customers everywhere. From offering the most creative products to providing the leading facilities for trading and clearing, CME proudly invents and implements risk-management solutions that help the world do business. We continue to broaden our product lines and expand our presence overseas to serve additional customers. We have built our CME Globex platform into the world’s premier electronic trading venue, and we continue to make it even more responsive and accessible to our ever-expanding base of customers worldwide. Through our constant emphasis on innovation, CME has become a vital force in today’s global financial markets. Our interest rate products help reduce the cost of borrowing and financing, while our foreign exchange products help facilitate cross-border trade and commerce without undue risks to profitability. At the same time, our equity products enable investors to manage stock market risks, thereby increasing investor confidence in these important markets. CME’s leadership in inventing financial futures, pioneering electronic trading and becoming the first publicly traded U.S. exchange has transformed our company into a model that others are following. As articles in the premier issue of CME Magazine attest, we are committed to helping you achieve your business and investment objectives in ways that enhance the dynamic global marketplace. We hope you enjoy reading CME Magazine!
Terrence A. Duffy
Chairman of the Board, CME


his new publication is designed specifically as a resource to keep our customers updated on the latest business initiatives and opportunities offered by our exchange. As leaders of the Chicago Mercantile Exchange, the largest and most diversified financial exchange in the world, we believe consistent communications is an important facet of the services we provide you.

Craig S. Donohue
Chief Executive Officer, CME

Premier Issue


Started in 1990 by Ken Griffin when he was only 22 years old. Focusing on probabilities plays a big role in each venture. the 2004 World Series winner. He used his long-term. Citadel has tapped into new investment areas to become one of the largest managers of private capital in the world today. Donohue. 30 4 CME magazine | www. With the launch of CME’s Enhanced Options System (EOS) on the CME Globex system.com . And the baseball team he owns. Cover story: FIELDING A DREAM John W. Connections: CITADEL INVESTMENT GROUP Setting a Fast Pace in the Investment World With the growth in electronic trading. reached the pinnacle of success by winning the World Series in 2004 for the first time since 1918. flexible options-trading strategies to accomplish almost any objective. CME 16 PHOTOGRAPHY BY JOHN SOBCZAK 8 16 23 26 23 26 30 China is a growing global economic force. the Boston Red Sox. Citadel Investment Group may be the model firm of the future with its emphasis on markets that trade electronically. trend-following approach. Platform: DERIVATIVES IN CHINA A Growth Opportunity By Craig S. Edge: TRADING AND TECHNOLOGY Perfect Match in CME Options Technology has had a huge impact on almost every area of life in the last 10 years. is prepared for FX trading growth with advances in electronic trading and options. CME.magazine PREMIER ISSUE FEATURES > 8 ON THE COVER John W. Henry has become a trading legend over the last 20 years with his longterm. Henry is on top of two worlds.cme. Collaborating with established global exchanges would help it accelerate the development of the derivative markets it needs to fuel further growth. trendfollowing approach to build a money management firm that is one of the largest managed futures advisory firms in the world. the world’s largest regulated exchange-traded FX marketplace. and has gained new fame as owner of the Boston Red Sox. or see speculative opportunities. Chief Executive Officer. Focus: FX TRADING SURGING IN ELECTRONIC SETTING The foreign exchange market has become one of the hottest trading areas in the last few years as traders and businesses worldwide recognize the need to protect themselves from adverse currency fluctuations. customers will be able to use sophisticated.

SuperDerivatives. 34 AT YOUR SERVICE CME Globex Learning Center gives traders a number of opportunities to learn about markets and ways to trade them. 34 Premier Issue > 5 . Bloomberg • Joining the electronic movement… CME E-livestock trading on the rise IDEAS THAT CHANGE THE WORLD 21 6 21 6 OPTIONS IN HAND: CME has added upgraded options trading functionality to its Galax-C handheld trading devices. further increasing options liquidity. See page 6 for details.contents DEPARTMENTS 3 INSIGHT CME is committed to helping customers achieve their business and investment objectives in ways that enhance the dynamic global marketplace. PULSE • Weather more than talk at CME • Quotes direct to you • Options in hand • Building a team • CME in Chinese MARKET INSIGHTS • More timely trading… CME adds weekly expirations for Eurodollar options • Equity index beat goes on… CME adds futures on ETFs and biotech index • More quotes in more places… CME FX on Reuters.

The heating-degree day and cooling-degree day contracts.com .com\e-quotes www. as well as interactive charts and Dow Jones news. depending on the level of service requested. CME created the first exchange-traded. European and Japanese cities. Weather is probably the single most important fundamental factor in many markets around the globe and is a key price factor for any business related to food and energy.cme. Data comes straight from the CME Globex electronic trading platform or CME trading floors and goes into Microsoft Excel spreadsheets.cme. such as the popular CME E-mini equity index futures contracts. www.500 contracts per day in 2005. interest rate and other markets. where weather derivatives contracts have been trading for more than five years and have grown into an actively traded market. based on weather in a number of U. averaging more than 3. it has an impact far beyond those areas.com\weather 6 CME magazine | www.cme. However.P U L S E News about CME Weather more than talk at CME “Everybody talks about the weather. Real-time data products from CME include streaming quotes for all CME futures and options on futures contracts..S. affecting corporate revenues and earnings and many aspects of daily life. Prices vary. AND ITS PRODUCTS AND SERVICES Quotes direct to you You do not have to subscribe to a third-party data vendor to get E-quotes with real-time data directly from CME. but nobody does anything about it” — except at CME. give traders an effective tool to manage risk from extreme movements of temperature. temperature-related futures and options in 1999 as a way to hedge risks associated with weather. just as traders can manage price risk in stock index.

Nearly half of those traders are in the CME Eurodollar market and have contributed to a substantial increase in CME Eurodollar electronic options volume. German. They include memoranda of understanding with Chinese exchanges to share information regarding the potential development of derivatives products in China. CME also offers portions of the Web site in French. CME has established a CME-Certified Options Partner Program to foster collaboration between the exchange and partner firms. These technology partners will provide global customers with access to software that supports new CME options products and functionality beginning in the third quarter of 2005.000 contracts traded per day.cme.Options in hand CME has added upgraded options trading functionality to its CME Galax-C hand-held trading devices. Approximately 400 traders use the CME Galax-C devices. Building a team To gear up for growth in electronic options trading. Italian.com\options >>> Premier Issue 7 .cme. locating CME’s first Asian-based telecommunications hub in Singapore will reduce connectivity fees for market users in the Asia-Pacific region. The initial group of partners includes 12 firms. The Chinese-language Web site follows other CME initiatives to reach the Asian market. five of which will provide software to support mass quoting. www.com\china www. which helps to merge the liquidity of electronic and open-outcry markets and gives a boost to electronic options volume. Any electronic options currently traded on the CME Globex platform can be traded on the hand-held units. CME in Chinese CME has taken another step toward educating markets in China about futures and CME products and services by posting the CME Web site on the Internet in Chinese. accounting for more than 120. Also. Japanese and Spanish.

(JWH) in Boca Raton.cme. including FX futures and options at CME. Henry & Company Inc. Henry is a trading legend. trading all global markets but with an estimated 40 percent of its assets invested in currencies. www.. Since its founding in 1982. has become one of the largest managed futures advisory firms in the world.com . turning trend following into a multibilliondollar money management firm that exemplifies the concept of finding a sound trading approach and then sticking with it through thick and thin. Fla.C O V E R S T O R Y a dream PROBABILITY APPROACH WINS BIG FOR JOHN HENRY IN TRADING. John W. BASEBALL fielding J 8 CME magazine | ohn W.

HENRY Founder. Owner. JWH Inc.” JOHN W.“Life is too dynamic to place a lot of credence in the past results of any program or any trader. Boston Red Sox .

averaging about 29 percent. Among this portfolio’s annual results is a gain of more than 250 percent in 1987. JWH has not been immune from some losing years among its 11 investment programs. From October 1984 to March 2005. by sticking persistently to its trading approach. taking just six months to reach a new peak. his name was the tenth John Henry on a list in a recent Google search. but the 10 CME magazine | www. for example. performance has always bounced back in a big way. a year better known to most investors for the stock market crash. average profit a year later was 68 percent.” However. the firm’s Financial and Metals Portfolio had 39 drawdowns greater than 20 percent. behind that “steel-driving man.cme.D espite its record of success.com . As well-known as Henry is in the managed futures world.

Henry and his partners purchased the Boston Red Sox for $690 million in 2002. With savvy marketing and personnel moves.Henry is actively involved with both JWH and the Red Sox but gives much of the credit for success in both areas to outstanding staff members such as Mark Rzepczynski. But the name of this John Henry is quickly becoming known by the public for his other role as owner of major league baseball teams. they turned a good franchise into one of baseball’s most successful franchises while playing in venerable Fenway Park with its famous “green monster” left-field wall. Premier Issue 11 . After being involved in the ownership of the Florida Marlins and the New York Yankees. president of JWH.

What got you interested in trading futures in the first place? JWH: My father and mother were farmers in Arkansas. CME: You have been described in The New York Times and elsewhere as “a cerebral man with a head for mathematics. the autobiography of Bernard Baruch. as some well-known traders have done? JWH: I started with a diversified portfolio called the “Original Program. I knew the approach would be very profitable. I knew I was short. president of JWH. every day in coffee going against us.cme. CME: First of all. I was particularly taken with Gann’s philosophy. and the Currency Strategic Allocation Program. Japanese yen. It was an amazing chart that showed the price of coffee had skyrocketed.” But how did you learn to trade futures – books. I came up with a philosophy of very long-term trend following. CME: As you began to evolve as a trader.” The first week of trading was in June of 1981.com . Our foreign exchange programs are the International Foreign Exchange Program.S. coffee and cocoa at the very beginning. Louis Cardinals in the World Series to break a “curse” dating back to 1918. CME: Let’s get right into your trading career. but I also knew the nature of long-term trend following is to have volatility. to include selecting the right players and the right tactics for situations based on probabilities. how did you develop your trendfollowing trading approach? JWH: I did not have access to computers. When my father died in the late 1970s. We’re limit up 12 CME magazine | www. It’s an amazing story. it was a gratifying year. I was so confident in my research and philosophy that I left the country and left stops with my broker. After dinner one night in Oslo that first week.T he Boston Red Sox completed one of the most storied seasons in baseball history in 2004 by coming back from a 3-0 deficit to defeat the New York Yankees and then sweeping the St. but we’ve made money every day you’ve been gone. Our financial portfolios include the Financial and Metals Portfolio. I strongly felt that the key to success in markets over the very long term was in having a valid philosophy of the markets that could not be shaken by results over the short or intermediate term.” CME: What markets did you trade in your early days? JWH: Soybeans. and the writing of W. A lot of Cubs fans in Chicago wish they could have some of that magic. will produce great results over the long run. I didn’t have a desire to find the holy grail by testing different methodologies. Life is too dynamic to place a lot of credence in the past results of any program or any trader. I called my broker and he said. . Gann. his money management firm. we offer two trading programs that combine the others – the Strategic Allocation Program. It goes far beyond bringing in a left-handed pitcher to face a left-handed batter. and the Red Sox. ? JWH: Early on I read Reminiscences of a Stock Operator.D. if they are valid. there are going to be periods in which doing the right thing every day appears to be counterproductive. I saw a chart on the front page of the Financial Times. the G-7 Currency Portfolio and the Dollar Program. . Henry is actively involved in both JWH. 30-year U.” CME: What were your early experiences in trading like? Did you start with big losses and then decide to figure out what trading was all about. With any valid philosophy in any field. gold. I retain the same fascination today. game theory and probability. Global Diversified Portfolio and the Global Analytics Family of Programs. As he has done with his trading. we are all dead. “Remaining true to your principles. I always distrusted results in the commodity markets and eventually across all markets. “In the long run. PCs were just coming out. who has been with the firm since 1998.” I would say. Our diversified portfolios are the Original Investment Program. which can invest in any of the other programs. British pounds. I decided that I needed to understand agricultural markets. you are on to something. Portfolios have changed as the markets have expanded. and the front office team of the Red Sox. which limits itself to the foreignexchange-only programs. Global Financial and Energy Portfolio and Worldwide Bond Program. I had been a student of philosophy and quickly began to find a bias toward trading philosophy over and above results. So I spent a few years studying markets. owner John Henry has infused his long-term thinking into the Red Sox system. If Keynes said. JWH: Yes. sugar. CME: How has your basic approach changed over the years? JWH: It hasn’t. trial-and-error . wheat. but gives much of the credit for success in both areas to outstanding staff members such as Mark Rzepczynski. “You know. copper. I was immediately fascinated with market movements. I equated this with valid philosophies in other areas such as business principles that endure regardless of cycles. Programs have been added. CME: How many different trading programs does JWH offer today? JWH: JWH offers 11 different trading programs to investors. But the basic philosophy is the same. congratulations on your success with the Red Sox. bonds. Additionally.

CME: With the spectrum of instruments available. 2005.5% 9. In addition.9% 16. Additionally. Interest rate markets have contributed significantly as well because bond prices move in long-term trends with the overall business cycle. we have seen a significant increase in volume and liquidity at the CME from electronic trading.0% 11. but they are not always liquid enough for our needs or are simply too small an instrument for our trading use. We have focused on U.9% 11.S. Cargill Investor Services . our approach has been consistent for the history of the firm. what is your view about trading futures instead of cash markets – specifically. to trade futures that provide returns uncorrelated with traditional assets. That having been said. Premier Issue 13 . CME: What is your view about trading futures rather than equities. we have not been as active in FX futures markets. in FX? JWH: Futures offer a uniformity and transparency not found in many cash markets. All of these firms serve as general partners for funds for which we are an advisor. Nevertheless.0% 8. Nevertheless. we have also seen significant interest from fund of funds in alternative assets because of our low correlation with other hedge fund styles. the use of ETFs and OTC instruments strays from our mandate – namely. This is primarily due to the liquidity available in cash FX markets.7% 12.8 billion as of March 31. The clients who could best use our expertise are those who want to diversify away from a traditional portfolio of stocks and bonds.4% 26. Exchange Traded Funds (ETFs) and other OTC markets are very interesting concepts. . .9% 8.5% CME: How do you “sell” your managed futures programs as an asset class to these clients? JWH: The primary benefit of managed futures is the low historical correlation to traditional assets. high-net-worth individuals as our key client group.Persistance Pays Off over the Long Run Program Original Investment Program Financial and Metals Portfolio International Foreign Exchange Program Global Diversified Portfolio G-7 Currency Portfolio Global Financial and Energy Portfolio Dollar Program Strategic Allocation Program Worldwide Bond Program JWH GlobalAnalytics® Family of Programs Currency Strategic Allocation Program Inception date 10/82 10/84 8/86 6/88 2/91 6/94 7/96 7/96 7/96 6/97 9/00 3. The FX markets have consistently shown trends since the inception of flexible exchange rates. exchangetraded funds. These instruments are good substitutes for index funds but are not the same as trading an underlying market.5% 9. especially for any active trading program. Our market selection and our investment methodology combine to give a return stream that is unlike a traditional longonly portfolio of equities and fixedincome instruments. CME: What have been the annual performances of these programs over the years? JWH: Perhaps the best way to answer that is with a table showing the annualized results of all 11 programs since inception through March 2005 (see table above). This is when you have strong market trends. Citigroup Futures. By maintaining the same models. This is causing us to reevaluate our trading at the CME. Our programs have done especially well during periods of market stress or dislocation. Morgan Stanley. CME: In what markets have your programs been most successful? JWH: Historically. we have had a significant portion of our assets raised directly from institutions and high-net-worth individuals. We have developed programs to meet client demand but have kept the same underlying philosophy for all our programs for our entire history. CME: How much money does JWH manage altogether in these programs? JWH: JWH manages $2. CME: What types of clients does your firm have or what types of clients can best use JWH’s money management expertise? JWH: Our largest clients are the biggest brokerage firms in the United States. CME: Any clients you can mention by name? JWH: Merrill Lynch. the over-the-counter (OTC) markets or other investment alternatives? JWH: We have been and remain a futures trading advisor.6% Annualized return since inception through March 2005 10. the programs have been most successful in the foreign exchange markets.

so I knew exactly what we were up against. I owned part of the Yankees for a decade. We try to be as objective as possible in our analyses. CME: In view of your baseball success in addition to your trading success. That is the nature of markets. there can be no greater dream than to own a team and become a participant. and this can push discipline right out of the way in the name of prudence. and that is why we have been successful over the long term. It is so much easier to access the market and transact trades. That is the nature of markets. We also look forward to new market participants in futures trading. Buying the Red Sox and winning a World Series with great partners was a storybook opportunity and a great accomplishment for an organization that had come so close over many decades. I see that as one of my primary roles. But prudence almost always dictates staying with the approach that has made you successful. And if you are a sports fan. The nature of trend-following is to adjust to changing market conditions. The influx of competitors to the managed futures field has been significant to our industry. Internally. what relationship do you see between successful trading and putting together a successful baseball team? JWH: There are a number of dissimilarities that people don’t want to hear about. I always say. JWH has migrated trading to these platforms as practical. and that is why we have been successful over the long term. I don’t make player decisions.com . I’m not qualified to run a baseball team. CME: What prompted you to get into baseball ownership? JWH: The investment business can be very insular. There also has been a shift of emphasis towards shorter time horizons for trading as a result of the decreasing execution costs. The nature of trend-following is to adjust to changing market conditions. The innovations from CME have made it more efficient to trade these markets. I’m a stickler for that. Another development I see on the horizon is the return of markets that will look very different from the low-volatility situation to which many traders have become accustomed. remain disciplined in executing that plan and pay attention to what is actually happening rather than what you expect to happen. the markets have changed. As markets have moved into electronic execution capabilities.” CME: What developments would you like to see in futures/options trading? JWH: We are constantly looking for new markets to trade. But that’s why systematic approaches make sense. I often encourage everyone during difficult days to be patient. But there are a few principles that guide both the Red Sox and JWH. I’m incredibly lucky to have the Red Sox and JWH. With developments in electronics. It’s the greatest rivalry in sports. I set a strikeout record at the Chicago White Sox Boys Camp in 1960…as a hitter. There is less emphasis on long-term trend-following. What was your baseball background as a player or coach? JWH: I played second base in Little League. which is good for everyone. which is our specialty. Some may see objectivity as impossible.CME: What effect have the CME Globex platform and innovations in electronic trading had on your trading? JWH: We have tried to remain at the forefront of new technologies. “Yes. This clearly adds to liquidity. the cost of entering new futures markets is much lower. while ensuring the security and accuracy of our trading. Every time JWH struggles – and that is usually annually – people ask if the markets have changed. CME: With such success in two diverse areas. I don’t blame people for the unexpected. There are more managed futures managers and global macro managers who use futures as a means of diversification and profit opportunity. You always encounter the unexpected. CME: What developments do you see coming in futures/options trading? JWH: Technology’s emergence into a predominant position in our industry is something that is ongoing in our industry.” “Yes. 14 CME magazine | www. It’s not always easy for people who are involved every day to stay with a plan when misfortune occurs for a time. We hope to see new products at CME. CME: What are the most significant changes that you have seen in futures trading and in managed futures since the early 1980s? JWH: Electronic trading has been the most significant change in futures trading.cme. we have developed capabilities to interface with these platforms. We have taken advantage of electronic trading and will continue to move in that direction. Being a lifetime baseball fan and having a great love for markets. So I am fortunate to have a brilliant general manager and a tremendous CEO. Owning a baseball team deeply connects you to important aspects of a community. It’s important to have a plan. Of course. the markets have changed. we have to ask a couple of baseball questions.

$40 billion in liquidity each day. volume growth of 151% over last year and trades backed by the world’s leading clearing house.CME FX ® Access more Tight bid/ask spreads. opportunity. the globe logo and Chicago Mercantile Exchange are trademarks of CME. Discover how global access can change your world. cme.com CME. global participation. . Take everything CME FX has to offer – and make the most of it.

SURGING TRADING IN .F O C U S X F Few markets have received more attention in the last few years than foreign exchange (FX). the world’s largest market with transactions estimated at more than $1.9 trillion a day.

As a result of the dollar’s movement. CME has been at the forefront of this interest in currencies. dollar. providing its customers with innovative concepts and products and making FX one of the fastest-growing areas at CME in the last two years. Many of the world’s commodities – from crude oil to soybeans to gold – are priced in dollars. more traders and businesses worldwide recognized the need to protect themselves from currency risks in their business operations. and the weakening dollar has been a significant contributor to rallies that have taken some commodity prices to record levels. Premier Issue 17 . into early 2005. The impact of a changing dollar value extends far beyond the FX market. the dollar was declining about 30 percent against a basket of major foreign currencies. Meanwhile.S. the euro appreciated about 50 percent and the Japanese yen about 25 percent against the U. S omewhere in that growing disparity in the relationship between the dollar and foreign currencies.N ELECTRONIC SETTING From Jan. 2002. 1. the role of currency fluctuations has become clearer than ever before and brought new traders to the FX marketplace. Others spotted speculative opportunities after returns from stocks and bonds became less appealing when the stock market bubble burst.

000 40. stock index and other financial contracts that now dominate global futures trading. CME not only trades the well-known currency pairs such as the dollar versus the euro or Japanese yen but offers trading in 16 currencies altogether. 20 X F TR 19 When it all began Innovation in FX trading goes back many years at CME.CME FX FUTURES VOLUME 1972 – 2004 50. more than doubling since the beginning of 2004 and accounting for more than 90% of CME FX futures volume. Financial institutions. page 18) but then began to fade by the mid-1990s with the introduction of the Reuters electronic tradematching platform and the growth of the interbank market. launched trading in “money.S. the ultimate commodity” with currency futures in its new International Monetary Markets division on May 16. FX trading activity was slow initially. CME FX futures volume is growing rapidly once again. CME gradually got the message across about the value of FX futures. 18 CME magazine | www.000 30. investment managers. and others to convince traders to use this new market.000. corporations and private investors can use CME FX futures and options on futures to manage risks associated with currency rate fluctuations and to take advantage of profit opportunities stemming from changes in currency rates. reaching almost 50 million contracts in 2004. they opened the way to interest rate. FX futures volume reached 25-30 million contracts annually by the early 1990s (see “On the Grow Again” chart.2 trillion in 2004 and accounted for about 5 percent of the world’s total currency-trading volume. and currencies were allowed to float.000.000 20. Responding to this sea change situation. now CME chairman emeritus. Endorsed by Nobel Prize-winning economist Milton Friedman. the price bands that had governed the relationship of currency values under the Bretton Woods Agreement for more than 25 years fell apart. CME trades more than 95 percent of all exchange-traded FX products in the world. 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 On the Grow Again After dipping during the mid-1990s. This represented a notional value of $6.000.000 0 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 As the largest regulated marketplace for foreign exchange. under the leadership of Leo Melamed. CME. as major money center banks set up their own online network to capture spot currency transaction business.000. 1972. dollar in 1971.com 02 04 . As the world’s first financial futures contracts. and it was not an easy sell for Melamed.000. CME’s FX futures provided a way to cope with the risk of fluctuating exchange rates during a turbulent economic period.cme. CME eFX FUTURES AVERAGE DAILY VOLUME April 2000 to February 2005 250 Average daily volume (thousands) 200 150 100 50 0 00 1 01 01 2 Au g02 De c02 Ap r-0 3 Au g03 De c03 Ap r-0 4 Au g04 De cFe 04 b05 0 00 r-0 r-0 cgAp gAp cDe Au Au De Ap r-0 Electronic Spark FX futures volume has been especially strong on the CME Globex electronic trading platform.000 10. After President Nixon removed the gold backing from the U. especially during the 1980s.

Future growth As spectacular as CME FX trading growth has been. Several banks provide around-the-clock liquidity to the CME futures markets.” says Yra Harris. Real-time CME FX futures prices are widely disseminated. were limited to major banks and currency dealers. so there is no dispute about the price at a given moment. With the addition of an electronic platform. Traders could trade FX futures at CME or cash forex at a number of new firms that popped up almost overnight. it may be just the beginning as CME continues to add ways to help customers use FX markets. like an Enron or Worldcom. RADING Those systems. Premier Issue 19 . “But in a world with twin deficits. however. AMPLE LIQUIDITY WITH TIGHT. typically paired against the U. where moves usually take time to unfold. CME Clearing House’s performance guarantee enhances liquidity and virtually eliminates default risk for CME customers. and the average size of each bid and offer rivals the cash market in liquidity. dollar – the euro. The launch of CME FX on Reuters in March opened the first major link between sell-side traders in the interbank FX market and hedge fund and other buy-side traders that play a significant role in the electronic contracts traded on CME. most of these interbank FX traders. which puts CME FX quotes in front of approximately 18. The process of selling is just as easy as buying. Canadian dollar. here are some other benefits CME FX futures offer: CENTRALIZED REGULATED MARKETPLACE. an independent CME trader. Here are several major developments that should keep CME FX on a growth path: CME FX on Reuters. but futures still provide big advantages for trading this mammoth marketplace. The connection brings spot and futures FX markets together on the Reuters 3000 platform. Companies and individuals that were not part of the existing network were largely shut out of the currency marketplace. many who traded equity or interest rate futures have migrated to CME FX futures. geopolitical tensions and other risks. Australian dollar and Mexican peso. allowing even more flexible positions for investors interested in more complex trading strategies. Major currency pairs in futures also have options available. EFFICIENT PRICING. Average daily electronic volume for CME FX has doubled since early 2004 and now accounts for more than 90 percent of all CME FX futures trading volume (see “Electronic Spark” chart. TRANSPARENT PRICING. In addition to electronic trading virtually 24 hours a day. Swiss franc. You do not have to worry about the financial stability of the party on the other side of your trade with futures because the CME Clearing House acts as the counterparty to every trade. With CME FX futures. currencies are an alternative investment source that can provide exposure to many types of conditions. currencies diminished from 1996 to 2001. FLEXIBILITY. electronic trading in FX began on a side-by-side basis with floor trading in April 2001. not just one firm or source setting the price or negotiating terms for buying or selling to take place. The price you see is what you get in CME FX futures – no relying on bid/ask prices set by one source. STABILITY. where unknown spread costs are factored into the private deals. in comparing the first 47 months of trading for each market. in many cases. but it will not be because another party did not fulfill its side of a futures transaction. currency futures have no restrictions on short selling.S. In many cases. Futures also have a verified record of trading activity through the CME Clearing House that can provide an audit trail. CME offered customers the ability to trade CME FX futures on its CME Globex electronic trading platform virtually 24 hours a day. most CME FX trading activity focuses on a few currencies. Currencies do not declare bankruptcy. less. and brokerage firms discourage the practice of selling stocks by imposing fees and other requirements. about the period when investors were more interested in chasing dotcom stocks. all available at one location. Previously available only for “after-hours” FX trading. Whether you are an individual investor. British pound. Instead of looking at thousands of companies or mutual funds and trying to determine which to buy and when. LOW EXECUTION COSTS. Numerous buyers and sellers from financial institutions to investment managers to corporate officers to individual traders of all sizes compete actively. CME offers competitive fee structures based on your membership type or volume. bank or professional money manager. In fact. You may lose money on a bad trade. sparking a resurgence in CME FX trading. page 18). fluctuations in CME FX futures are less than in volatile stocks – you do not see many one-day 10 percent changes in FX values – and FX has a reputation for being a better trending market. one of the most popular and successful futures contracts ever offered. “As an asset class. all costs are fully disclosed. SIMPLICITY. The euro currency quotes regularly show a one-point bid/ask spread. Japanese yen. Many equity instruments cannot be sold on a downtick.WHY CME FX FUTURES? The expansion of the interbank market and blossoming of cash forex firms have increased participation in the forex market.” Turning to CME FX futures To attract traders to the integrity of the exchange-traded marketplace and to increase FX futures trading. so the playing field is level for all participants of any size.000 FX professionals worldwide. the average daily volume in electronic trading in CME FX futures grew at a faster pace than the CME E-mini S&P 500 contract. Multiple contributors establish bid/ask prices. CME implemented a series of initiatives focusing on FX trading and responding to FX customers’ needs as the value of the dollar began to weaken. MARKET INTEGRITY. Like other futures. CME offers flexible pricing plans for many customer types. proprietary trader. Trading fees for currency futures on CME are comparable to OTC market prices and. Prices are not skewed to favor a dealer’s position as they may be in the over-thecounter (OTC) market.

But that should change as part of the CME options initiative. Anyone who wants to trade can see the same prices as the biggest bank trader because trading in a centralized marketplace produces a single price. CME E-quivalents makes that conversion instantaneously so FX spot traders can trade CME FX futures in price terms with which they are most familiar. for example. However. see the technology article.000 2. Education at CME involves a number of different aspects that go well beyond FX.12. the Japanese yen is quoted as the dollar value of one yen – 0.000.2500 for the euro. X F To make FX futures understood more clearly by traders accustomed to trading FX spot markets. CME FX options bring transparency to the OTC market.009423 (or usually just 9423 on futures quote screens).000 6. In addition. page 26. which has traded European-style options for many years.000.cme. For CME customers. Options on FX futures. other currencies have different quoting conventions in the interbank and cash markets. FX options volume has remained relatively steady since the late 1990s.cmeonreuters. CME developed E-quivalents on its Web site to quote real-time FX futures prices in spot-equivalent terms. page 34).com\equivalents TRADING Part of the process involves the introduction of Europeanstyle options. Futures are quoted in dollars per the foreign currency. that means a broader. but they are not the type of options used by the over-the-counter (OTC) market. where much of the CME FX trading now takes place (see the education article.000. American-style options that can be exercised at any time 20 CME magazine | www. not just during the OTC market-maker’s trading day.000.000 10. (For more on CME’s options initiative and FX.000 4. CME’s growth strategy for options is changing that picture. including helping traders make the transition from floor to electronic trading. Banks can offer their clients broader FX market access and clearing services that will help them expand their global futures business in one of the fastestgrowing marketplaces. more flexible range of strategies they can use to achieve their investment objectives. prior to expiration have been popular in many markets. page 20). Reuters’ customers can now compare FX spot and futures prices quickly on the same screen and have more execution options for their FX trading decisions.000 0 84 86 88 90 92 94 96 98 00 02 20 19 19 19 19 19 19 19 19 20 20 04 Room to Grow While CME FX futures volume has been booming. CME’s options initiative program is an exchange-wide focus to expand options trading.cme. But for CME FX specifically.000 8. the quoting conventions are clear for both spot and futures traders – $1.Real-time market prices for the recently introduced CME European-style Euro FX and Japanese yen options also now appear on SuperDerivatives SD-FX platform. While the graphs clearly illustrate the recent surge in CME FX futures trading. In the spot market. the usual quote is in yen per dollar – 106.000.000. which can be exercised only on expiration day.) Education. These moves have the potential to increase CME FX volumes as more banks participate and add even more depth and liquidity for CME Globex markets. a recent education effort is directed at the FX retail trader who has been trading online at a cash FX firm. For example. options on CME FX futures volume has languished since the mid-1990s (see “Room to Grow” chart. For some currencies such as the euro and the British pound.com . CME’s addition of European-style options gives OTC traders a familiar way to trade electronically virtually 24 hours a day. where the limited price offerings are often not as good as FX futures quotes and where counterparty risk is greater. not a range of prices that OTC market-makers might quote. in futures markets. in this example. For more information on CME FX on Reuters visit www. which is used by about 90 percent of the banks active in FX options.com For more information on CME E-quivalents visit www. CME FX OPTIONS VOLUME 12. which gives customers more flexible trading choices and could produce dramatic volume increases in the years ahead.

m. giving traders a new way to take a view on upcoming economic releases and their effect upon U. The weekly options expire at the conclusion of trading on each Friday that is not an expiration day for a quarterly or a serial one-year mid-curve option. (Chicago time). continues to expand its equity index product line with new concepts. and 200 shares of QQQQ. First. • The maximum permissible order size for selected CME Eurodollar futures and combinations executed on the CME Globex platform has been increased from 5. which already accounts for more than 92 percent of all U. which further enhances the depth and liquidity of the electronic CME Eurodollar market. which gives the new ETF futures a much smaller notional value of about one-fifth the size of E-mini futures.000 to 10. equity index derivatives trading.S. CME launched futures trading in June on two of the largest and most actively traded ETFs: the NASDAQ-100 Index Tracking Stock (QQQQ). commonly called “Spyders. the world’s most actively traded interest rate futures contract: • CME Eurodollar pack spreads and pack butterfly combinations are now listed on the CME Globex platform. Traders can also take advantage of several other recent developments in CME Eurodollar futures.” An additional ETF futures contract. CME is bringing together two of the most popular new trading ideas introduced during the mid-1990s with the addition of futures on exchange-traded funds (ETFs). ETF futures are physically delivered instead of cash-settled as other CME equity products are. interest rate markets. the Premier Issue 21 . Futures contracts are for 100 shares of SPY and IWM. until 3:15 p.” and the S&P 500 Depositary Receipts (SPY).S.M A R K E T I N S I G H T S Insights on CME PRODUCTS AND SERVICES fifth quarterly or first “Red” contract. (Note: Clearing firms may set different limits. meaning a minimum of five expirations will always be available. Risk managers now have the opportunity to trade on one of the most actively traded CME Eurodollar futures expirations. Trading takes place on the CME Globex electronic trading platform from 8:30 a. That means traders will be able to take a more timely position for key reports such as the U.cme. widely known as “the Qs. employment report released on the first Friday of every month and often a market-moving announcement.com\eurodollar Equity index beat goes on CME adds futures on ETFs and biotech index CME. More timely trading CME adds weekly expirations for CME Eurodollar options CME now offers weekly expirations for CME Eurodollar oneyear mid-curve options.000 contracts.S.m. which grew up with CME E-mini stock index futures. also was launched. based on the iShares Russell 2000 Index Funds (IWM).) www.

000 15. SuperDerivatives SD-FX options pricing system is widely regarded as the FX market’s benchmark. including an on-screen view of best bids and offers. where hedge funds and other major buy-side participants play a major role.cme. SuperDerivatives users will also be able to view indicative volatility levels for CME’s FX options contracts. SuperDerivatives. the marketmakers expand opportunities for all participants. Currently.cme.000 5. and you will see executable prices on all CME currencies in spot-equivalent terms. open for cattle. SuperDerivatives will also add functionality to allow customers to buy and sell CME FX options contracts through SD-FX in a second phase. one of the most dynamic investor sectors in today’s marketplace. Chicago time). www. most of the trading in the large.cme.com . more places CME E-mini and ETF futures complement each other in the portfolios of sophisticated individual investors. 9:10 a. CME E-livestock traders also have greater control over the entire trading process with one-click execution of orders and instantaneous knowledge of their positions. www. CME FX on Reuters. Bloomberg CME FX futures quotes are reaching a more global audience these days with CME FX on Reuters continuing to add more clearing firms and service to the Asia Pacific region as well as SuperDerivatives now offering real-time prices for CME European-style euro FX and Japanese yen options on its SD-FX platform. CME FX futures quotes appear in spot-equivalent terms on the Reuters Dealing 3000 screen. In addition to current price quotes. Five market-makers are actively posting continuous bids and offers in live cattle. feeder cattle and lean hog futures. for hogs until 1 p. while the venture between SuperDerivatives and CME provides a bridge for greater price transparency between over-thecounter and exchange-traded FX options markets. with the ability to view prices in premium and volatility quoted terms. simplifying usage for cash-market participants who can compare cash and futures market pricing and take advantage of the benefits offered by futures. which are quoted in different ways.and European-style. like all futures. the depth of liquidity available and the size of the CME FX futures and options market. including brokers and institutional traders. scheduled to be launched in September on CME Globex and traded almost 24 hours a day. Thousands of additional traders are now seeing CME FX quotes. A second addition to the CME equity index product line are futures and options based on the NASDAQ Biotechnology Index (NBI). Just enter CMFX and <Go> on Bloomberg. By providing transparent and competitive prices. are trading the electronic livestock markets. with executable functionality. liquid and sophisticated FX options market is concentrated in the over-the-counter market. which are traded side-by-side with the CME livestock products traded on the floor during the regular trading session (9:05 a. Bloomberg also is offering the ability to trade CME FX futures in spot equivalent terms on its Tradebook platform. page 16) provides a key link between spot and futures markets on the world’s leading FX desktop. Bloomberg’s application allows you to enter your own forward points as well as view indicative rates from forward and spot dealers who participate on the Bloomberg platform. These new contracts are the first futures designed specifically to hedge risk in the biotech sector. close.m. both American. Bloomberg also is offering all CME FX options on futures products on their platform. further helping to build liquidity.000 Contracts 10. This can be critical information for FX options traders as the real market price for even plain-vanilla options can deviate substantially from the theoretical value produced by Black-Scholes type models. ETF futures.com\e-livestock 22 CME magazine | www. Several groups of new users. which is necessary to sell short securities or ETFs. quantities and depth of liquidity. In addition. current information. allow investors to take a short position without having to borrow shares from a broker.com\etf CME E-Livestock Volume 20.000 0 January 2005 February 2005 March 2005 Joining the electronic movement E-livestock trading on the rise Like a number of financial markets. trading CME E-livestock futures provides traders with immediate. CME FX on Reuters (see feature article on FX. NBI includes more than 150 component stocks covering the biotechnology and pharmaceutical industry. The SD-FX system gives users a way to compare prices on FX futures and over-the-counter markets.More quotes. electronic trading in CME livestock futures has seen some sharp increases since a market-maker program was introduced in January. with around 90 percent of the banks active in FX options using the platform. CME FX on Reuters is the first major link between sell-side traders in the interbank FX market and electronic CME FX futures markets.m. As with other electronic markets.m.

C O N N E C T I O N S Prominent Perch In the Investment World CITADEL INVESTMENT GROUP Two key Citadel staff members.C. may well be the prototype for investment firms in the future. president of Citadel Execution Services. discuss strategies. Citadel Investment Group L. and Jason Lehman. Premier Issue 23 .L. Matt Andresen (with tie). head of global volatility arbitrage. A With an emphasis on electronically traded markets.

“We are relentless in our execution. For example. Tokyo. Citadel’s flagship Wellington fund.” Andresen comments. both in the nature of its investments and in its geographic scope. president of Citadel Execution Services. which enables us to respond quickly and successfully to market developments and investment opportunities worldwide. more than the total amount of capital the firm had under management in 1998. Citadel’s daily volume in these products will likely grow exponentially. Citadel has become a phenomenal success story in investment management and related services in just 15 years. “As more products are migrated to a robust electronic market.6 million. “In many ways. Since 1998. we invest in markets that offer the superior electronic model for quoting and execution.” says Matt Andresen. Of the approximately 1. “What differentiates us is the integration of our exceptional talent and sophisticated technology. about 500 are IT professionals versus approximately 300 investment professionals. specialists in string theory and even meteorologists in key trading and research positions. more efficient and fairer. the fund Griffin started in November 1990 with $4. has experienced an annualized rate of return of more than 25 percent from January 1.” “Citadel has always been committed to investing in technology. head of global volatility arbitrage at Citadel. San Francisco and New York.After creating $4-$5 billion in value for its investors since 1998. Therefore. former chief executive officer of Island and former chief operating officer of Instinet. Citadel’s affiliate. Citadel today is a highly diversified company with six major lines of business: • Global Value Investments • Global Markets and Quantitative Strategies • Global Credit • Global Energy • Global Equities • Global Interest Rates 24 CME magazine | www. Meticulous research and rigorously designed trading strategies that emphasize controlling risk have brought Citadel consistently strong returns over the years. Citadel’s world-class team of investment professionals includes former college mathematics professors.cme. 1998. Their quantitative research develops new trading strategies and updates old models as they seek high risk-adjusted returns for investors through a disciplined. to March 2005. “Citadel’s activity in CME’s option products is directly correlated with the transition to an electronic trading platform. astrophysicists.” One example of Citadel’s emphasis on technology is in the composition of its employees. Technology and electronic trading have played a major role in Citadel’s success. Role model With a stellar track record like that. Citadel has created between $4 billion and $5 billion in value for its investors.” That suggests that Citadel’s presence at CME will be even greater as CME continues to expand its electronic trading capabilities. but its business extends far beyond just that area. “We have a strong preference for trading contracts that are transacted on an electronic platform. Founded by then 22-year-old Ken Griffin in 1990.” Lehman notes. Our trading inevitably increases as markets become automated. Citadel Limited Partnership.” adds Jason Lehman. we have begun to transcend what is commonly viewed as a hedge fund. is now one of the largest managers of private capital in the world.000 people that Citadel currently employs at its headquarters in Chicago and offices in London.” says Andresen. Andresen says. More than a hedge fund Citadel is often characterized as a hedge fund. it is no wonder that Citadel is held in high regard by the investment world and why others might want to copy Citadel’s path in the future.” Since its founding in 1990. multi-strategy approach to global markets. Citadel has expanded and diversified the strategies it oversees to cover all major asset classes. “We believe that electronic markets are inherently faster. it is no wonder that Citadel is held in high regard by the investment world and why others might want to copy Citadel’s path in the future. “We allocate our investment capital across six major investment strategies and participate in virtually every major asset class. Within each of our strategies we combine fundamental analysis with the use of advanced technology and quantitative research to drive superior risk-adjusted returns.com . Overseeing more than $12 billion in investment capital.

Griffin maintains a rather low profile. Our entry into options market making is a great example of this. Investors in Citadel’s world-class operation include major corporations. Citadel entered the energy trading business to fill the void in the market following the difficulties in the merchant energy business. But instead of publicizing his own name with each successful venture. this commitment gives us the internal capability and resources to capitalize swiftly on new opportunities around the world. “We place a tremendous emphasis on leadership development and have worked diligently to avoid a ‘star’ culture. In 2002. foundations. endowments and pension funds as well as other institutional investors who are attracted to Citadel funds because of their record of consistently generating high risk-adjusted returns.” Premier Issue 25 .” Andresen explains.” Low-key leader Despite his prominent role in investment fund management and a record of consistent success over the years.Citadel has a strong track record of using its technology to move quickly to take advantage of market developments. Technology base Citadel has a strong track record of using its technology to move quickly to take advantage of market developments. just as you might hook up additional appliances to a generator. “Liquidity and market integrity are strong considerations in our decision to trade these products. “Citadel has spent 14 years developing broad and deep expertise in technology and in quantitative research that is fully integrated into our trading and investment businesses.” he adds. is also a leading market-maker in listed options in the United States. all committed to learning. an affiliate of Citadel.” Lehman says.” “Citadel uses a number of CME products to express a trading view and to hedge risk. That may seem a bit unusual for the head of a firm that currently accounts for approximately two percent of the total daily dollar volume traded on both the New York Stock Exchange and NASDAQ. going back to Griffin’s early days after founding the firm. we stress the critical importance of teamwork by outstanding individuals. excellence and winning. Putting together a convertible bond arbitrage model and starting to trade from his dormitory room at Harvard College in the late 1980s – just in time to be on the short side of the October 1987 stock market crash – Griffin jumped into Japanese equity warrants. European convertible bonds and other investment areas as he identified and exploited new market opportunities. Griffin has focused on building teams within the organization to share the credit for achieving successful results. “Instead. Citadel Derivatives Group LLC. “These skills are the ‘generator’ for the firm. Ultimately. We are always looking for new opportunities to apply these skills. for example.

Provides the Perfect Match N owhere is the technology emphasis more evident at CME than in its Enhanced Options System (EOS). flexible trading strategies and increase electronic trading in CME Eurodollar options. and that universal trend is certainly reflected in trading developments at CME. EOS also will be applied to CME E-mini equity index and CME FX options markets as well. A key element of the exchange’s options growth initiative. 26 CME magazine | www. ENTHUSIASTIC RESPONSE “I am very excited about the future of EOS. a market-maker firm in CME Eurodollar futures and options. Ultimately. EOS is a major technological step forward that will help customers use sophisticated.E D G E Trading and Technology: OPTIONS TECHNOLO A dvances in technology have had a significant impact on almost every business in the last 10 years.cme.com .” says Will Hobert. managing member of WH Trading.

whereas less than five percent of CME options products are screen-traded.” agrees Don Kuster.. Premier Issue 27 .S OGY PHOTOGRAPHER H. “The main driver is transparency. CME is: > Continuing to implement technology to support the right market models for electronic options trading. but EOS will change the dynamics of the trader of the future from needing a strong pit presence to having an affiliation with a good programmer. a proprietary trading operation that also is a marketmaker for CME Eurodollars options traded in the pit and via EOS. So there is plenty of room for options growth at CME. “Electronic trading is the future. so he is well aware of the changes in trading as a result of EOS. And electronic trading is faster and anonymous. It’s here to stay and will get even more robust as more people get used to it. To drive that growth.” he says. managing director of Citigroup Derivatives Markets Inc. Prinz/CORBIS Hobert traded currency options and CME Eurodollars on the floor for 14 years before moving to the computer screen to concentrate on CME Eurodollar futures and options in 2003. “The trader will still have to have strong intellect.” The significance of developing technology to trade options at CME can be seen in volume numbers: More than 70 percent of CME futures products are now screentraded.

Options are available for all months including the interim months – July and August options based on the September futures contract. matching buy and sell orders in futures is a rather straightforward process. And everything must be done in a Foreign exchange models are usually based less on price than on risk. Conducting an extensive marketing and education program. timely manner – that is. Most financial futures have quarterly expirations (March. Bids.com . add several wrinkles to futures that increase their complexity: CALLS OR PUTS. Eurodollars. the technology challenge grows exponentially because of the nature of the instrument for different types of markets.” he notes. Depending on the recent range of prices. and. but when it comes to options on those futures. even on a volatile day. Because options are used by many mathematically oriented traders employing various risk models.cme. Hobert. Options. but most futures markets have active trading in only a relatively small number of contract months. STRIKE PRICES. MONTHLY EXPIRATIONS. including efforts to establish industry-wide standards to distribute data. for example – multiplying the number of choices. the first phase of the EOS makes it “crystal clear” what the bids and offers are. Therefore. December). FROM FUTURES TO OPTIONS Futures themselves require sophisticated technology to match orders online instantly and to disseminate price information. “You don’t have to call the floor constantly to get bids and asks. Introduced in August 2004. for example. which is a factor of volatility. Every change in futures prices may mean changes in the options bid/ask prices for every option based on each futures contract. are based on a call-around tradition. June. so this immediately doubles the number of quotes. customers look not only for bid/ask quotes on outright calls or puts at different strike prices but also for quotes on spreads between options. offers and trade prices change constantly in futures. on the other hand. They’re right there on your screen. the requirements for each product area are different. CME’s electronic platform currently replicates the dealer network by posting electronic requests for quotes to which market-makers respond with two-sided bids and offers and size without having to call around for quotes. call or put options may be available at dozens of strike prices on either side of the current price. So CME’s electronic platform for FX has to be focused on making the translation between volatility and price.> > > Increasing market-making to facilitate liquidity. open and >>> 28 CME magazine | www. OPTION SPREADS. for one. Working closely with 22 independent service vendors to facilitate options trading on its CME Globex platform. options may involve 80 messages. Traders do not just buy or sell at a market price but buy or sell the right to be long (call) or the right to be short (put) at a specific price. so CME has to provide electronic features for three different types of trading communities. in milliseconds – must be reliable 24 hours a day and must be cost-efficient. Hobert points out. September. “It was usually in the best interests of the caller and not me. TAILOR-MADE In addition. Instead of two messages in and out for futures. is not a fan of the European call-around market because he says he could not rely on what he was told on the phone.

electronically has broadened to more sophisticated far more than for other CME Globex markets. EOS will be able to 11% handle all kinds of orders.000 “instruments” or parameters The universe of CME FX participants who trade to define the CME Eurodollar options trading process. Each Mass quoting capability also is a technology focus contract has calls and puts at multiple strike prices. “About 90 percent of what is done in the pit is probably available online now. period may be as long as several years. This feedback. for CME equity index and foreign exchange options this Then there are almost innumerable combinations of year as more market-makers are designated for these options that traders can conceive to accomplish an markets and the volume of quotes increases.” Kuster says. number of clearing firms for CME FX on Reuters as well as service in the Asia Pacific region. It takes more than 80. Kuster says traders can already do pretty much what they want with option strategies on EOS. market transparency and options involve massive quantities of data.transparent to all. and CME has added a that will be available to all traders. The whole process of what technology CME needs to MASSIVE QUOTING provide begins with the customer.” Hobert remarks. and bids and offers are changing constantly. who typically is looking The additional elements required for all of these different for immediate market access. proprietary trading shops and retail traders who vide a continuous flow of indicative quotes and data use algorithmic trading models.” 51% 48% 47% 38% 61% 32% 66% 1% 1% CME Globex 2% Privately Negotiated 100 80 CME Interest Rate Products* 100 80 CME Foreign Exchange Products* 72% 76% Percent 60 44% 40 28% Percent 52% 51% 60 40 60% 64% 67% 20 20 Ultimately. objective. Reuters means that CME has to rely on technology to provide efficient trading solutions for the anticipated Foreign exchange models are usually based less growth in volume.Total Exchange 1Q04 – 2. The planning front-end to open access via the CME Globex platform. EOS will end-users such as currency overlay managers. so users can trade the full interest-rate spectrum. which is a factor of volatility. in addition to the implied in and out bids and www. hedge hold bids and offers for all of these situations and profunds. together with requirements Technological enhancements this year will expand from operations regarding transparency and visibility.com\options offers for calendar and butterfly spreads launched last year.cme. Premier Issue 29 . These advances in CME technology placing it in service may be months. “When we went through our daily trade logs recently. access from a closed system with only a CME-provided helps CME with its plans for future growth.1M 67% 31% 1Q05 – 3. on price than on risk.9M THE FUTURE IS NOW Although EOS is still evolving to facilitate institutional trading. Integrating “It is the equivalent of having thousands of different cash and futures FX markets with CME FX quotes on pits and market-makers.2M 4Q04 – 3. He expects electronic and pit options trading to continue side-by-side for a long time. there were very few trades we were not able to do on EOS.3M 52% 3Q04 – 3. So CME’s electronic platform for FX has to be focused RESPONDING TO CUSTOMERS on making the translation between volatility and price. CME must and will increase the number of market-makers and prepare for trading business well before it arrives indicative quotes for outright and spread combinations in because the lead time for acquiring equipment and CME Eurodollars. adding that his firm does have three people in the pits.” he says.8M 2Q04 – 3. Users meet trading platform designed for options requires features with CME officials regularly to review the exchange’s and functionality not needed with futures. will soon allow firm-quoting functionality for straddle positions. CME Electronic Migration Average Daily Volume . latest developments and react to what they like or do not like. and any competitive price discovery and liquidity. CME 0 0 1Q04 2Q04 3Q04 4Q04 1Q05 1Q04 2Q04 3Q04 4Q04 1Q05 Eurodollars have options repre* Share of total value traded electronically senting 10 years across 40 contract months.

Craig S. including its prospects for derivatives markets that could accelerate their development by collaborating with established global exchanges.com . Donohue • Chief Executive Officer • CME CHINA’S GDP HAS OUTPERFORMED THE 30 CME magazine | www.cme.P L A T F O R M derivatives in CH A GROWTH OPPORTUNITY Everything about China seems to be growing.


My experience suggests that such derivatives markets are essential adjuncts to fuel China’s further economic growth.544 2. labor pool. Its imports of crude oil in 2004.527 1.5 percent in 2004. China has rein in economic growth because of concerns a labor force that is about an overheating economy. China’s gross domestic product (GDP) has grown nearly 8 percent per year. which currently account for only about 39 percent of China’s GDP vs. Even with a more controlled growth program. } Power to the People 4. corporations and financial institutions with valuable hedging and risk-management tools necessary to preserve the economic benefits of China’s increasingly free and growing market economy.P L A T F O R M Since 1980.S. From corn to copper. the free flow of accurate market and financial information. from cement to crude oil. Despite attempts to 1. That’s hardly news to anyone who follows global economic statistics With a population of or stories in the media. property rights. page 33). China’s real seven times larger than GDP rose 9.cme. labor pool. A s a result of this growth.. NEXT STEP: DERIVATIVES The promise of China’s continued economic expansion offers valuable opportunities to develop its derivatives markets for hedging and risk management of financial exposures.3 billion. 70 percent in the United States.1 percent growth in 2003.036 1. China will continue to emerge as not only a source of lower-priced labor for manufactured goods but also as a fertile area for increased consumer expenditures. dollars 2.3 billion. page 33).. over its 9. officials expect the same type of expansion for the next few years. growth in oil imports in upcoming years (see “Oil Flows” chart.018 509 0 5 0 2 5 0 0 5 197 198 198 199 199 200 200 Source: Globalis China’s gross domestic product per capita figure has grown sharply in the last 25 years. China has become a dominant force in the world marketplace for commodities of all kinds. according to China’s National Bureau of Statistics.S.S. Access to global interest rate. 32 CME magazine | www. China has a labor force that is seven times larger than the U. an increase the U. were up 33 percent from the 2003 level. and Japanese shares have declined (see “China on the Move” charts. These issues are well understood within China and are being addressed. stock index and foreign currency futures and options contracts will provide Chinese banks.S. China is a rising economic force (see “Power to the People” chart.562 3.com .580 4.071 3. China’s shares of world manufacturing and world exports have grown dramatically in the last 15 years while U. and the adequacy of corporate disclosure and accounting standards. for example.S. resolution of financial failures and defaults. page 32). and demand is expected to grow on a pace that nearly matches projected U. China faces fundamental challenges relating to credit and monetary policies. With a population of 1.053 U.

subject to strong incentives to operate efficiently and honestly. Energy Information Administration China will nearly match the United States as a dominant driver of additional demand for oil over the next 15 years. This can be accomplished by China’s exchanges opening up to investment.S. This approach will be most advantageous as the global derivatives markets. Europe. They also would create new opportunities for traders. Mutually beneficial partnerships will help broaden the distribution and reach of China’s derivatives markets. as well as the safety and soundness of the related banking. over time. and have the ability to detect. These three fundamental requirements are best accomplished by close cooperation between the government and private sector entrepreneurs. deter and punish individuals or entities that engage in practices that can lead to market manipulation or unsound business practices. joint venture and commercial business arrangements with other global exchanges and intermediaries. These efforts can and should be undertaken from within. China on the Move 35 30 25 Percent 20 15 10 5 0 0 5 0 3 5 0 198 198 199 199 200 200 Share of the World of Manufacturing 20 15 Percent 10 5 0 Share of the World's Exports 5 0 0 3 0 5 198 198 199 199 200 200 US Source: Global Insight Japan Germany China The impact of China on the global economy shows up clearly on these graphs as its shares of world manufacturing and world exports are rising sharply while U.cme. its own global equity capital markets. China’s exchanges can accelerate their growth by collaborating with global exchanges to utilize their extensive infrastructures. EXCHANGE LINKS Another challenge facing China is how best to gain entrée to the global capital and financial markets. this uncertainty should be embraced as an unavoidable and even positive feature of dynamic market economies. and industry-standardized business practices. www. Government should strive to create an environment that requires exchange directors and managers to take full responsibility for all business decisions. such as those trading futures and options on futures. • These exchanges must ensure standardized practices and rules for market participants. Japan and elsewhere.S. Oil Flows Growth in Demand for Oil 2000-2001 8 7 6 Million barrels/day 5 4 3 2 1 0 US China Western Europe Japan Source: U. just as the advantages created by leveraging established non-Chinese equity capital markets with global reach are clearly complementary to China’s sovereign interests in further developing. economic analysis and the creation of sound market regulation standards. Changes forthcoming in Chinese derivatives markets will create new opportunities to extend the rapid pace of economic growth unleashed by the country’s historic move toward a market economy. Although China’s markets may face periods of uncertainty in terms of global investment and expansion. such as those trading futures and options on futures: • Chinese exchanges must ensure that all participants have equal and immediate access to accurate and fully transparent market information. increasingly standardize and consolidate to meet users’ and intermediaries’ demands for lower operational costs and greater capital efficiencies.Other unique challenges relate to the establishment of successful derivatives markets. settlement and custodial functions necessary to support market transactions.com\china Premier Issue 33 . whether seeking speculative profits or hedging risks. and by engaging in education and training efforts to ensure the prudent use of Chinese financial and agricultural derivative contracts. and Japan shares are declining. However. trading and clearing platforms. China can develop its derivatives market infrastructure successfully by concentrating on product development. • Chinese exchanges must guarantee the financial performance of all transactions in their markets. to trade Chinese markets as readily as those in the United States.

which will fast-paced as futures or options trading. The tunities to traders.S. acquiring that confidence requires education or training to courses as well as the upcoming become comfortable with new or different situations. presenting in CME Globex sites and other extensive studies by the exchange’s and loss statements to resources. where traders can literally walk off of webinars offered by CME staff and offers a variety of educational opporthe trading floor and learn about knowledgeable industry experts.” and the GLC includes several facets. futures exchange • Providing a physical location topics during 2005 as will the number and the first to be publicly traded. The GLC is the world’s first Individuals or groups of ly interactive and only electronic trading training traders from firms or Information facility. 34 CME magazine | www. That confidence does not come from CME classrooms.cme.com and click on CME’s business strategy for education practice in a simulated trading setting. The GLC has revealed a need to help its members ing progress. • Giving traders as many classes as according to DeBorah Lenchard. make a smooth shift from floor to • Making traders more familiar and and hundreds take CME classes. For more details about occurred on some overseas exchanges every day. go to to electronic trading overnight.Learning Center at Chicago headquarters. screen trading. pits and gives traders a chance to www. WHERE TRADING BEGINS I to anyone in the world and more than 30 on-site classes available in it is confidence in what he or she is doing. trying to stations lets traders experience realsome are available on weekends. CME has offered classes about ner vendors (ISVs) as well as news the computer statrading for a number of years but took and data quotes from tions in the GLC.com . focus groups and can print out their profit CME Chairman Terry Duffy (right) with Vice Chairman Jim Oliff. the largest U. programs all in one locaaccess to books. and pits to electronic trading. global leader in financial services and out and compare many where traders have technological innovation. “Education. CME developed the GLC after a tion. A learn technical analysis for the first time trading in a mock environment number of the classes include lab time or developing knowledge and using the latest software provided by a time. drop in volume and liquidity such as is playing a bigger role in trading every year. include links with partner firms for simulated trading. already logged thousands of visits.com\education director of CME’s education programs: This includes online classes available F THERE IS ONE THING ANY TRADER NEEDS TO BE SUCCESSFUL. which allows students to blend skills to trade on an institutional trading number of independent software parttheory with practical applications on desk. especially in an endeavor as Electronic Trading 101. Classes are scheduled to expand into a broader range of CME. The online offerpredicting market movement but from preparing for market movement. Electronic Transition Committee keep track of their trad. associate possible on a wide range of topics. It also would prevent any comfortable with technology. illustrating CME’s role as a university classes can try Resource Center. its education program a huge step CME.cme. For most traders. This includes training on class subjects. they publications. whatever that ings are primarily trading foundation may be. the Chicago • Converting forward in March 2004 with the opening Board of Trade and other CME’s traditional of the CME Globex Learning Center partner vendors. instructors and a when they changed from open-outcry the CME hand-held units used in the schedule of current classes.cme. which either online or in the classroom. library into a total(GLC). Web member survey. A GLC classroom with computer after the regular trading session. Additionally.A T Y O U R S E R V I C E Education @ CME. www. whether they are electronic trading without financial classroom classes are usually offered making the transition from open-outcry risk.

Instructor: Dan Gramza | Cost: $250 Options for Beginners (5 sessions) September 13-October 11: (Tuesdays) 3:30 p. CME also conducts seminars at locations around the world as well as webinars available on the Internet. David Prosperi (Corporate Public Relations). . . Part 2 (5 sessions) August 9-23: (Tuesdays and Thursdays) 4:00 p.m.m.m.CME Education Opportunities In addition to the classes listed here. September 12: (Monday) 12:00 p. © CME 2005 CME Magazine is printed on recycled paper. 21. Bryan Hunter (Foreign Exchange Products). On-Site Classroom Courses CME • 20 S.com.cme.com with your questions and comments. Chicago Mercantile Exchange®.cme. go to www. Pamela Plehn (Product Public Relations). S&P MidCap 400® and “Standard & Poor’s Depositary Receipts®” are trademarks of Standard & Poor’s.com info@cme.com.m. Inc. . Parts 1 and 2 Introduction to Screen and Pit Trading Options for Beginners The Markets Electronic Trading Strategies Dynamics of Foreign Exchange Markets Money Markets and Futures Pricing Interest Rate Hedging Market Profile Trading Strategies Stock Index Markets Options Options for Beginners Options Trading Technical Analysis – Options Strategies Advanced Options Fundamental and Technical Analysis Media. Instructor: Dan Gramza | Cost: $250 Principles of Futures. Instructor: John Nyhoff | Cost: $200 Technical Analysis Options Strategies November 15.m. All other trademarks are the property of their respective owners.6:00 p.com e-mail Senior Editors Anita Liskey. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME rules.3:00 p. Further information about CME and its products is available on our Web site at www.m.m. 17. seating limited to 24) August 6: (Saturday) 9:00 a. or to be added to or removed from the mailing list. a division of The McGraw-Hill Companies. The NASDAQ-100® Index.5:00 p. “S&P 500®”. Current CME rules should be consulted in all cases concerning contract specifications.m August 8: (Monday) 12:00 p. All rights reserved. .com\cmemagazine Premier Issue 35 . Allan Schoenberg (Technology Public Relations) CME Magazine is published by CME in conjunction with Penton Custom Media.m. .5:00 p. Thursday. . Monday.cme.1:30 p. Wednesday. Inc. Galax-C® and E-quivalents® are trademarks of CME. Instructor: Ken Shaleen | Cost: $200 Following is a complete list of CME on-site classes available at various times. sometimes in conjunction with partner brokerage firms or partner vendors. IL 60606-7499 • 312-930-1000 Technical Analysis (7 sessions) August 2-23: (Tuesdays and Thursdays) 4:00 p.pentoncustommedia. iShares ® and iShares Russell 2000 Index Fund™ are trademarks of Barclays Global Investors. The Russell 2000 ® Index is a registered trademark of Frank Russell Company. . Lynn Lipsig (Marketing). David Lerman (Equity Products).com Editorial Director Darrell Jobman Art Director David Bosak Do you have a question for CME Magazine? E-mail us at info@cme.m. Globex®.m. 9th Street Cleveland.m. courses and seminars or more information about any of the items listed. William Parke Editorial Advisory Board Tim Doar (Clearing).m. seating limited to 24) September 10: (Saturday) 9:00 a. IL 60606-7499 312-930-1000 tel 312-466-4410 fax www. NASDAQ-100 Index Tracking Stock® and QQQ® are registered trademarks of The Nasdaq Stock Market. Instructor: Ken Shaleen | Cost: $320 Market Profile Trading Strategies (2 sessions. CME Magazine CME 20 South Wacker Drive Chicago. Tuesday) 4:00 p. For a current schedule of all classes. Penton Custom Media 1300 E.m. Instructor: Mickey Hoffman | Cost: $150 Electronic Trading Strategies (2 sessions. 16. the SuperDerivatives logo and SD-FX® are trademarks of SuperDerivatives Inc.m.5:30 p. OH 44114 216-696-7000 tel 216-931-9441 fax www. CME®.m. Introductory Principles of Futures. and are licensed for use by CME. Information made available on our Web site does not constitute part of this document. E-mini™. The Globe logo.com\edu or call 312-930-6937 or e-mail edu@cme. Manias and Markets Japanese Candlestick Trading Strategies Off-the-Floor Trading Strategies Screen-Based Day Trading Techniques Technical Analysis Technical Analysis – Options Strategies Technical Approaches to Trading Trading in the Eye of the Storm 21st Century Elliott Wave Theory Advanced Advanced Technical Analysis Advanced Options Advanced Japanese Candlestick Trading Strategies Advanced Market Profile Trading Strategies Advanced Technical Approaches to Trading To view CME Magazine online visit www.6:00 p. Ray McKenzie (Foreign Exchange Products).cme. 22: (Tuesday.m.. .3:00 p. Instructor: Larry Schneider | Cost: $220 Introduction to Screen and Pit Trading (1 session) September 10: (Saturday) 9:00 a. John Harangody (Commodity Products). Robin Ross (Interest Rate Products).6:00 p. Wacker Drive • Chicago.m. SuperDerivatives ®.

cme. anytime – day or night. POSTAGE PAID COLUMBUS. Discover how more opportunity can change your world. used under license. The Russell 1000® Index and Russell 2000® Index are registered trademarks of Frank Russell Company. PRSRT STD U.. Inc. S&P 500® is a registered trademark of the McGraw Hill Companies. IL 60606-7499 Change Service Requested .com CME. Frank Russell Company assumes no liability in connection with the trading of any contract based on the Russell 1000 or Russell 2000 Indexes. OHIO PERMIT NO. 4416 20 South Wacker Drive Chicago. the globe logo and Chicago Mercantile Exchange are trademarks of CME. NASDAQ-100® is a registered trademark of The Nasdaq Stock Market.CME® E-MINITM OPTIONS ON FUTURES Opportunity – kicked up a CME E-mini S&P 500®. notch. CME E-mini NASDAQ-100® and CME E-mini Russell 2000® futures and options on futures now trade together on CME Globex®. Seize $60 billion in liquidity each day electronically from anywhere in the world.S.

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