February 5, 2015 / 2:26 AM / 6 years ago

Open-outcry trading stood no chance, says futures 'father' Melamed

CHICAGO, Feb 4 (Reuters) - Leo Melamed is known as “the father of financial futures,” and on the day electronic futures trading killed off its pit-style sibling, Melamed said it was all for the best.

The CME Group Inc announced on Wednesday plans to close most of its open-outcry futures pits by July 2.

“I believed this would be the eventual outcome, and I never had a doubt,” Melamed, chairman emeritus of CME Group, told Reuters on Wednesday.

Melamed was a key player in the introduction of currency futures in 1972, the first financial futures. When he was chairman of the Chicago Mercantile Exchange, predecessor to the CME Group, Melamed introduced electronic trading to the futures industry in 1992 in the form of a computerized system called Globex.

Chicago floor traders at first resisted, particularly at the rival Chicago Board of Trade, which ultimately was acquired by CME Group. Futures volume at the Chicago exchanges, which averaged about 2 million contracts a day when Globex started, now regularly exceeds 15 million per day.

Melamed acknowledged he did not foresee some downsides to electronic trading, such as potential market manipulations by high-frequency traders. “You’ve got to fight fire with fire. You’ve got to build technology that can find any violations,” he said.

The original Globex system, designed for CME by Reuters, featured large antennae spanning the trading pits like ribs of an umbrella. The first trades took 15 seconds to execute, compared to milliseconds on CME Group’s computers today.

“It was almost snail mail back then. Today, it’s almost near the speed of light,” Melamed said.

In his own trading, Melamed said, it took nearly a decade to switch fully to electronic trading. “It’s an entirely different aptitude,” he said. “It’s a difficult, difficult adaptation, and not one everyone can make.”

Melamed, a lawyer who started trading as a sideline in the 1960s, still trades today. He said he has been long the dollar since the currency started climbing last year. “The conditions indicating the dollar is king. I saw that coming,” he said.

CME Group is continuing open outcry in options on futures, in which pit-style trading survives because computer technology has not yet fully addressed the complexity of futures-options. The reprieve is only temporary, Melamed said.

“Options have a lot of staying power in the pit, but electronic trading will eventually take over,” he said.

Reporting by David Greising; Editing by Lisa Shumaker

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