Career & Life
Please tell us about your early career.
I would like to start looking back even earlier than CME, as my interest and love of the business was literally built from when I was at high school. My first job - a summer job - was on the floor of the New York Stock Exchange when I was 17 years old, and I became intrigued and fascinated by the business at that time. Of course, I look back now, and can see how little I knew! But I had caught the bug – the concept of trading, and of markets, and the excitement of it all. It’s hard to describe what those trading floors were like in their heyday back in the 60s, but they were absolutely captivating for those who found them interesting.
Perhaps the real reason I got into this was because my father was in the business. He was on Wall Street for 60 years. So, when I showed interest, he encouraged me, and I had the good fortune to have three summer jobs at different securities firms on Wall Street, after which I went to college and law school.
I then started working for my dad in an investment banking brokerage firm on Wall Street, where I was a compliance lawyer, interestingly enough. I came into the business from a legal perspective, and with a very healthy respect for the rules and regulations underpinning it.
Your contribution to the options and futures industry, and indeed the wider market structure sector, is without parallel. Your leadership of CME and CBOE has been visionary. Please tell us about the key moments - good and bad - that have defined your career.
One of the first defining moments I had was at that firm as a compliance lawyer. Some folks from Chicago met with us, trying to sell seats on an exchange that hadn’t yet opened, and it was called the CBOE. They wanted our firm to buy a charter membership - a seat - and I was tasked with doing the requisite paperwork. Then it turned out that obtaining a membership required someone to qualify the firm and take a test, and that someone turned out to be me. Preparation for that test piqued my interest in options. That was 1972. And yes, I passed the test!
Another defining moment was in the spring of 1973. The stock market was in horrible shape and I told my wife that we wouldn’t be making much money that year. She said, well, why don’t you write an article, so at least from a professional point of view, your year isn’t lost. So, I wrote an article on the rules of the CBOE because I had studied it to qualify the firm. I was fortunate enough to have the article published in a very prominent securities journal, which then gave me some distinction, because no one else knew anything about it. (This was still before CBOE had opened.)
Concurrent to that, something called May Day was also happening on Wall Street. (It took place in the UK as well, but at a later date.) In the US, the government had required exchanges to have unfixed commissions, so in other words, competitive commission rates. So, at the same time that CBOE was opening, the whole system on Wall Street was going through tremendous turmoil.
The firm I was with had made the decision that they could not successfully survive in this new world, and ultimately merged with another firm in the spring of 1974. And because I worked with my dad, my feeling was that I should move out of the way, as he and his partners wanted to sell.
The confluence of these events - the creation of CBOE, my article, along with the unfixing of commissions - this all prompted me to go out and look for a new job. I didn’t need to move jobs at that moment but it was the timely thing to do. So, I left, and started working at the American Stock Exchange (AMEX), which was a very substantial institution in the industry at that point in time. They were looking at what was happening in Chicago, and watching CBOE with interest and decided they needed to get into options. They had taken notice of my article, and so I helped them get into the options business. In fact, AMEX was the second exchange in the world to get into options. I eventually became head of the options division of AMEX, and as a result, went on the board of the newly created Options Clearing Corporation (OCC), based in Chicago, and I started travelling to the city on a regular basis.
The next defining moment was when a head hunter contacted me, and asked me to be COO of the Chicago Mercantile Exchange (CME) in 1982. So, we picked up, and moved to Chicago, which in those days was a pretty radical move when you’re on Wall Street! Nobody left New York for Chicago!
One of the most difficult defining moments was the stock market crash of 1987, while I was at the CME. We were literally blamed for the downfall of western civilisation. We were brought before Congress, and stock index futures were blamed - the CME in particular - for dragging the stock market down 20% in a day. It was a very, very difficult time. But we made it into an opportunity because we took the time to make people understand that futures were not some ‘snake oil’, but rather, an important financial instrument that was tied to the stock market. The cash market in New York and the futures market in Chicago were not independent markets - they were truly linked together. And the crash proved that.
At that time, I was just trying to survive, both professionally and personally. And it went on for the better part of 18 months. I was in Washington almost every week. Luckily, I had people with whom I was very close to in the CME itself - Leo Melamed and Jack Sandner in particular - but I would say that throughout all of these periods, it was my wife I looked to for support most, and also to my dad. My dad was my mentor, and was with me through that period, and until he passed away in 1996.
The most difficult thing I encountered in CBOE was the issue of migrating from a very vibrant, large and complicated floor-based exchange to an electronic market. This was difficult because of our membership structure, and because the people who owned the exchange didn’t want to make that change, so that was a tough period, too. It’s probably the most challenging thing we’ve had to do.
What was also difficult was our complicated and often litigious relationship with the creators of the CBOE, the Chicago Board of Trade (CBOT). We had an issue called the Exercise Right, which involved CBOT members having trading privileges at both CBOT and CBOE, which delayed our ability to go public for a long time, as we were tied up in litigation with them for five years.
Now, with CBOE’s acquisition of Bats Global Markets, we are still the largest options market in the U.S., but we are also about to become the second-largest equity market operator in the U.S., and the largest equity market in Europe.
You’ve held a number of roles at the WFE, including Chairman (2009-2011), and you are currently Chairman of the WFE Working Committee. Your unwavering support and dedication to the WFE has seen it transform into a powerful global advocate for the exchange and CCP sector. What is your proudest achievement related to the WFE?
I would say it was my role as Chairman during the height of the 2008 financial crisis, where I was a spokesperson, both in op-eds and at events like Davos, commenting on the critical role played by regulated exchanges during that whole period, a role that was flawless. I wrote an article in the Financial Times saying there were no closures, no bailouts - everything worked at the exchanges and clearing houses. We didn’t need any support from anyone. There was transparency. There was liquidity. And that story had never been told. It was popular to generalize and blame everything in finance, but the exchanges worked the way they should have, and I was pleased to be able to make that better understood.
I’m also proud of the transition of the WFE from Paris to London, and ultimately supporting the leadership that Nandini is providing.
What does the next phase of your life (and career) hold for you?
This month I complete 20 years as Chairman of CBOE, and my announcement last May was that I would be stepping down at our annual shareholders meeting in May 2017. I will be joining my son’s investment management firm that he just started, a firm specialising in equities that only trade outside of the U.S.
One of the nice things about this is that it brings together so many things that I’ve done over the years. For example, I chaired the investment committee at our hospital here - Northwestern Memorial, the largest hospital in Chicago - for 14 years. I hired managers, reviewed performance, looked at fees, and other things related to how an institutional investor would invest billions of dollars. Now I’m going to the other side of the table.
The first fund that we’ve offered at our new firm, which is called Cedar Street Asset Management, was an emerging markets small-cap fund. I’m very conscious that in this very dynamic world of financial services, what’s important is to have a product that distinguishes you from things that are easily replicated. Non-U.S. small-cap stocks is one of those areas.
My son has lived outside the U.S. on many occasions, and has learned about other markets, regulatory schemes, and cultures. That’s very important. It’s not just a matter of what the numbers are. You also have to understand the geo-political and economic issues, where you want to invest, where not to, what liquidity is like. So, all of these things have come together for me and for him, as he launches this new firm. And our second fund is in developed market companies, so the UK, France, Germany Switzerland, Japan etc., but small caps in those countries.
What is the single most important event or product that has revolutionised the market structure space?
Although clearly technology has been the most defining change in the financial markets in my tenure - just dramatic in so many ways - it transcends all markets.
So, for me, it would to be the creation of the CBOE itself, and of exchange-traded derivatives. Having said that, commodity futures on exchanges had existed for many, many years, and changing from commodity futures to financial futures wasn’t that big of a leap, even though it was not insignificant.
But what I think was most significant was the creation of CBOE. When you think back, options were trading in Amsterdam, Paris and London back in the 1600s, but it wasn’t until the creation of CBOE in 1973 that they were traded in a standardised, fungible way through a clearing house. That was pivotal.
The second revolution would be the CBOE’s creation of the whole volatility product line. Volatility has not only become an asset class in itself, but has helped to define the equity markets in ways it could not have been defined before. And it’s only since CBOE created the CBOE Volatility Index (VIX Index) and tradable VIX options and futures that it’s gotten that kind of attention. Not a week goes by when you don’t read an article in the Financial Times or Wall Street Journal related to the volatility of equity markets, and it is CBOE’s VIX Index that is the global standard.
It’s fair to say the past decade has been a tumultuous one globally, from the financial crisis right the way through to Brexit and President Trump. What are your macro predictions for the next ten years?
I would like to stress the importance of investor education, and while I know the U.S. perspective, it applies across the world. The fact is that our industry has created some of the finest products for investors: transparent, price-competitive products for investors, institutional or individual. And these days, more and more people are managing their own financial futures including their retirements, in ways they never had to before.
But somehow there is a disconnect in terms of understanding that we have these products that are truly good for investors, and how you explain to investors how to use those products. I’ve seen the tremendous evolution of world-class products for all - what I call the democratising of markets and how people can benefit from them - but investor education has not caught up.
In terms of who needs to take responsibility for that education process, well, speaking from the U.S., the reality is the education system at all levels needs to do a better job of it, and there is also a certain level of opportunity that the exchange industry, and the wider financial services sector, could tap into as well.
Our educational arm, the CBOE Options Institute has been around since 1985, and of course, the Options Industry Council does an excellent job teaching about options. The WFE’s Financial Education Study Group (FESG) is an important task force. It’s making people aware of the issue and hoping to spread the word at different levels.
Is there someone who has had a real impact on you as a leader, perhaps a mentor or coach?
I would like to focus on my dad and wife.
From my dad, the two most important things I learned were: integrity in all you do; and treat people the way you wish to be treated. That’s my guiding principle from a management point of view.
My wife has been the constant rock and confidante in my life, and someone I have always relied upon, all through these years. In particular, going back to her suggesting I write that article about CBOE, and who would have thought I would have ended up being chairman of the board of CBOE for 20 years! She’s been the one who I can go to, in confidence, about any of these issues.
Sometimes I do play the role of mentor to my sons, all three of whom are in our industry. I’m proud to see their success, and the way they can interact, because each brings a different dimension to things. In fact, tonight (13 February 2017) is the Brodsky Family Lecture at Northwestern Pritzker School of Law. We believe in giving back, and we believe in education at all levels, but in this case this is the graduate school level for those on the JD-MBA program. All three of our sons have JDs and MBAs from Northwestern. So, this was my wife’s and my way of thanking the school for giving them these great educations. The whole family will be together tonight, and the idea is to share thoughts on legal and markets-related issues.
What is the biggest challenge facing leaders of exchanges and CCPs today?
I’m completing 49 years in the business, and the most exciting fact is that it’s always changing. These leaders need the ability to manage change, the ability to try and stay ahead, and to understand where the world is going. Of course, regions change at different paces, but the world will continue to change much faster than it ever did in the past, because the structure of exchanges has changed. That’s always been the challenge, and will remain so in the future as well.
What do you look for when you’re hiring?
I look for track record, but mostly I want to understand how they work with people, not just at their own level and above, but those below them, more importantly. Can they motivate people? Can they create loyalty? Could they do the right things by these people? I go much deeper. I would rather have people that I really know, than people I don’t know, and if I don’t know them I will do a tremendous amount of due diligence. Because sometimes people are good on paper, but you really need to know what their record was with working with other people at all levels.
Finally, please share your top tips for success.
Treat people the way you want to be treated. If you manage by fear, you will lose good people.
Work hard, work smart, and always work with integrity.