Cmemagazine Premiere

7/29/2019 Cmemagazine Premiere

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J OHN W. HENRYFounder, J WH Inc.

Owner, Boston Red Sox

FIELDINGA

DREAM

magazine

I D E A S T H AT C H A N G E T H E W O R L D

Probability approach wins

big for John Henry in

trading and baseball plus:

A MODEL SUCCESSCITADEL SETS THE PAC

page 23

DERIVATIVES IN CHA GROWTH OPPORTUN

page 30

A MODEL SUCCESSCITADEL SETS THE PAC

page 23

DERIVATIVES IN CHA GROWTH OPPORTUN

page 30

plus:

P R E M I E R I S S U EP R E M I E R I S S U EP R E M I E R I S S U E


2/36

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

EURODOLLARSIts easy to spot the leader.

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

cme.com

2


3/36

Premier Issue

WELCOMWelcome to CME Magazin

WE ARE PLEASED TO INTRODUCE THE PREMIER ISSUE

I N S I G H T

his newpublication 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 con-

sistent communications is an important facet of the services

we provide you.

CME Magazinewill offer insights into CMEs 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 worlds 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

todays 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.

CMEs 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 ofCME Magazine

attest, we are committed to helping you achieve your business and investmentobjectives in ways that enhance the dynamic global marketplace.

T

We hope you enjoy readingCME Magazine!

Terrence A. DuffyChairman of the Board, CME

Craig S. DonohuChief Executive Offi


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CME magazine | www.cme.com4

>

PREMIER ISSUE

Focus:

Connections:

Edge:

Platform:

8 FIELDING A DREAMJohn W. Henry is on top of two worlds. He used his long-term, trend-following approach to build a money management firm that is one ofthe largest managed futures advisory firms in the world. And thebaseball team he owns, the Boston Red Sox, reached the pinnacle ofsuccess by winning the World Series in 2004 for the first time since1918. Focusing on probabilities plays a big role in each venture.

16 FX TRADING SURGING IN ELECTRONIC SETTINGThe foreign exchange market has become one of the hottest tradingareas in the last fewyears as traders and businesses worldwide recog-nize the need to protect themselves from adverse currency fluctuations,or see speculative opportunities. CME, the worlds largest regulatedexchange-traded FX marketplace, is prepared for FX trading growth withadvances in electronic trading and options.

23 CITADEL INVESTMENT GROUPSetting a Fast Pace in the Investment World

With the growth in electronic trading, Citadel Investment Group may bethe model firm of the future with its emphasis on markets that trade elec-tronically. Started in 1990 by Ken Griffin when he was only 22 years old,Citadel has tapped into newinvestment areas to become one of thelargest managers of private capital in the world today.

26 TRADING AND TECHNOLOGYPerfect Match in CME OptionsTechnology has had a huge impact on almost every area of life in the last10 years. With the launch of CMEs Enhanced Options System (EOS) onthe CME Globex system, customers will be able to use sophisticated,flexible options-trading strategies to accomplish almost any objective.

30 DERIVATIVES IN CHINAA Growth OpportunityBy Craig S. Donohue, Chief Executive Officer, CME

China is a growing global economic force. Collaborating with establishedglobal exchanges would help it accelerate the development of thederivative markets it needs to fuel further growth.

ON THE COVER

John W. Henry has

become a trading

legend over the last 20

years with his long-

term, trend-following

approach, and has

gained newfame as

owner of the Boston

Red Sox, the 2004

World Series winner. 16

23

26

30

8

Cover story:

magazine

PHOTOGRAPHY BY

JOHN SOBCZAK

FEATURES


5/36

>

Premier Issue

3 INSIGHTCME is committed to helping customers achieve theirbusiness and investment objectives in ways that enhancethe dynamic global marketplace.

6 PULSE Weather more than talk at CME

Quotes direct to you

Options in hand

Building a team

CME in Chinese

21 MARKET INSIGHTS More timely trading

CME adds weekly expirations for Eurodollar options

Equity index beat goes onCME adds futures on ETFs and biotech index

More quotes in more placesCME FX on Reuters, SuperDerivatives, Bloomberg

Joining the electronic movementCME E-livestock trading on the rise

34 AT YOUR SERVICE

CME Globex Learning Center givestraders a number of opportunitiesto learn about markets and waysto trade them.

OPTIONS IHAND

CME has addeupgrade

options tradinfunctionality t

its Galax-handheld tradindevices, furthe

increasinoptions liquidit

See page 6 fodetail

34

6

21

contentsI D E A S T H AT C H A N G E T H E W O R L DDEPARTMENTS


6/36


You do not have to subscribe to a third-party

vendor to get E-quotes with real-time data directly

CME. Real-time data products from CME inc

streaming quotes for all CME futures and option

futures contracts, such as the popular CME E-mini eindex futures contracts, as well as interactive charts

Dow Jones news. Data comes straight from the

Globex electronic trading platform or CME trading f

and goes into Microsoft Excel spreadsheets. Prices

depending on the level of service requested.

Quotes direct to you

except at CME, where weather derivatives

contracts have been trading for more than

five years and have grown into an actively

traded market, averaging more than 3,500

contracts per day in 2005.

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. However, it has an impact far

beyond those areas, affecting corporate

revenues and earnings and many aspects

of dai ly l i fe . CME created the f i rst

exchange-traded, temperature-related

futures and options in 1999 as a way to

hedge risks associated with weather. The

heating-degree day and cooling-degree day

contracts, based on weather in a number of

U.S., European and Japanese cities, give

traders an effective tool to manage risk from

extreme movements of temperature, just as

traders can manage price risk in stockindex, interest rate and other markets.

Weather more than

talk at CME

Everybody talks about

the weather, but nobody does

anything about it

P U L S E

News about CMEAND ITS PRODUCTS AND SERVICES

www.cme.com\weather

www.cme.com\e-qu


7/36

Premier Issue

To gear up for growth in electronic options trading, 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. The

initial group of partners includes 12 firms, five of which will

provide software to support mass quoting.

Building a team

CME has added upgraded options trading functionality to its

CME Galax-C hand-held trading devices. Any electronic

options currently traded on the CME Globex platform can

be traded on the hand-held units, which helps to merge the

liquidity of electronic and open-outcry markets and gives a

boost to electronic options volume. Approximately 400 tradersuse the CME Galax-C devices, account-

ing for more than 120,000 contracts

traded per day. Nearly half of

those traders are in the CME

Eurodollar market and have

contributed to a substan-

tial increase in CME

Eurodollar electronic

options volume.

Options in hand

CME has taken another step toward educating mark

China about futures and CME products and servic

posting the CME Web site on the Internet in Chinese

also offers portions of the Web site in French, German, Japanese and Spanish.

The Chinese-language Web site follows other

initiatives to reach the Asian market. They include

oranda of understanding with Chinese exchanges to

information regarding the potential developme

derivatives products in China. Also, locating CME

Asian-based telecommunications hub in Singa

will reduce connectivity fees for market users i

Asia-Pacific region.

CME in Chine

> >>www.cme.com\options

www.cme.com\c


8/36

C O V E R S T O R Y


John W.Henry is a trading legend,turning trend following into a multib

dollar money management firm that exemplifies the concept of find

sound trading approach and then sticking with it through thick and thin.

its founding in 1982,John W.Henry & Company Inc.(JWH) in Boca Raton,Flabecome one of the largest managed futures advisory firms in the world, tradin

global markets but with an estimated 40 percent of its assets invested in curre

including FX futures and options at CME.

PROBABILITY APPROACH WINS BIG FOR JOHN HENRY IN TRADING, BASEBAL

fieldingfieldingaadreamdream


9/36

J OHN W. HEFounder, J WH

Owner, Boston Red

Life is too

dynamic to

place a lot of

credence in the

past results of

any program orany trader.


10/36


Despite its record of success, JWH has

not been immune from some losing

years among its 11 investment programs.

However, by sticking persistently to its trading

approach, performance has always bounced

back in a big way. From October 1984 to March

2005, for example, the firms Financial and

Metals Portfolio had 39 drawdowns greater than

20 percent, averaging about 29 percent, but the

average profit a year later was 68 percent, taking

just six months to reach a new peak. Among this

portfolios annual results is a gain of more than

250 percent in 1987, a year better known to most

investors for the stock market crash.

As well-known as Henry is in the managed

futures world, his name was the tenth John Henry

on a list in a recent Google search, behind that

steel-driving man.


11/36

Premier Issue

But the name of this John Henry is quickly becoming known

by the public for his other role as owner of major league base-

ball teams. After being involved in the ownership of the Florida

Marlins and the New York Yankees, Henry and his partners

purchased the Boston Red Sox for $690 million in 2002. With

savvy marketing and personnel moves, they turned a good

franchise into one of baseballs most successful franchises

while playing in venerable Fenway Park with its famous

green monster left-field wall.

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, president of JWH.


12/36


T he Boston Red Sox completed one of the most storied seasons in baseballhistory in 2004 by coming back from a 3-0 deficit to defeat the New YorkYankees and then sweeping the St. Louis Cardinals in the World Series to break acurse dating back to 1918. As he has done with his trading, owner John Henry hasinfused his long-term thinking into the Red Sox system. It goes far beyond bringing

in a left-handed pitcher to face a left-handed batter, to include selecting the rightplayers and the right tactics for situations based on probabilities.

Henry is actively involved in both JWH, his money management firm, and theRed Sox, but gives much of the credit for success in both areas to outstanding staffmembers such as Mark Rzepczynski, president of JWH, who has been with the firmsince 1998, and the front office team of the Red Sox.

CME: First of all, congratulations on your success with the Red Sox.Its an amazingstory.A lot of Cubs fans in Chicago wish they could have some of that magic.

JWH:Yes, it was a gratifying year.

CME: Lets get right into your trading career.What got you interested in trading

futures in the first place?

JWH: My father and mother were farmers in Arkansas. When my father died in thelate 1970s, I decided that I needed to understand agricultural markets. So I spent a fewyears studying markets, game theory and probability. I was immediately fascinatedwith market movements. I retain the same fascination today.

CME:You have been described in The New York Times and elsewhere as a cerebralman with a head for mathematics. But how did you learn to trade futures books,trial-and-error . . . ?

JWH: Early on I readReminiscences of a Stock Operator, the autobiography ofBernard Baruch, and the writing of W.D. Gann. I was particularly taken with Gannsphilosophy. I had been a student of philosophy and quickly began to find a biastoward trading philosophy over and above results. I always distrusted results in the

commodity markets and eventually across all markets.

Life is too dynamic to place a lot of credence in the past results of any program orany trader. I strongly felt that the key to success in markets over the very long termwas in having a valid philosophy of the markets that could not be shaken by resultsover the short or intermediate term. I equated this with valid philosophies in otherareas such as business principles that endure regardless of cycles. With any validphilosophy in any field, there are going to be periods in which doing the right thingevery day appears to be counterproductive.

If Keynes said, In the long run, we are all dead, I would say, Remaining true toyour principles, if they are valid, will produce great results over the long run.

CME: What were your early experiences in trading like? Did you start with biglosses and then decide to figure out what trading was all about,as some well-knowntraders have done?

JWH: I started with a diversified portfolio called the Original Program. The firstweek of trading was in June of 1981. I was so confident in my research and philosophythat I left the country and left stops with my broker. After dinner one night in Oslothat first week, I saw a chart on the front page of theFinancial Times. It was anamazing chart that showed the price of coffee had skyrocketed. I knew I was short.I called my broker and he said, You know, you are on to something. Were limit up

every day in coffee going against us, butweve made money every day youvebeen gone.

CME: What markets did you trade in

your early days?

JWH: Soybeans, 30-year U.S. bonds,gold, British pounds, Japanese yen,copper, wheat, sugar, coffee and cocoaat the very beginning.

CME: As you began to evolve as atrader, how did you develop your trend-following trading approach?

JWH: I did not have access to computers.PCs were just coming out. I didnt havea desire to find the holy grail by testing

different methodologies. I came up witha philosophy of very long-term trendfollowing. I knew the approach wouldbe very profitable, but I also knew thenature of long-term trend following is tohave volatility.

CME: How has your basic approachchanged over the years?

JWH: It hasnt. Portfolios have changedas the markets have expanded. Programshave been added. But the basic philosophyis the same.

CME: How many different tradingprograms does J WH offer today?

JWH:JWH offers 11 different tradingprograms to investors. Our diversif iedportfolios are the Original InvestmentProgram, Global Diversified Portfolioand the Global Analytics Family ofPrograms. Our financial portfoliosinclude the Financial and MetalsPortfolio, Global Financial and EnergyPortfolio and Worldwide Bond Program.Our foreign exchange programs arethe International Foreign ExchangeProgram, the G-7 Currency Portfolioand the Dollar Program. Additionally,we offer two trading programs thatcombine the others the StrategicAllocation Program, which can investin any of the other programs, and theCurrency Strategic Allocation Program,which limits itself to the foreign-exchange-only programs.


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Premier Issue

We have developed programs to meetclient demand but have kept the sameunderlying philosophy for all ourprograms for our entire history. Bymaintaining the same models, ourapproach has been consistent for thehistory of the firm.

CME: What have been the annual

performances of these programs overthe years?

JWH: Perhaps the best way to answer thatis with a table showing the annualizedresults of all 11 programs since inceptionthrough March 2005(see table above).

CME: In what markets have yourprograms been most successful?

JWH: Historically, the programs havebeen most successful in the foreignexchange markets. The FX markets haveconsistently shown trends since theinception of flexible exchange rates.Interest rate markets have contributedsignificantly as well because bondpricesmove in long-term trends withthe overall business cycle.

CME: How much money does J WHmanage altogether in these programs?

JWH:JWH manages $2.8 billion as ofMarch 31, 2005.

CME: What types of clients does yourfirm have or what types of clients canbest use JWHs money managementexpertise?

JWH: Our largest clients are the biggest

brokerage firms in the United States. Inaddition, we have had a significantportion of our assets raised directly frominstitutions and high-net-worthindividuals. The clients who could bestuse our expertise are those who want todiversify away from a traditional portfolioof stocks and bonds. Nevertheless, wehave also seen significant interest fromfund of funds in alternative assetsbecause of our low correlation withother hedge fund styles.

CME: Any clients you can mentionby name?

JWH: Merrill Lynch, Citigroup Futures,Morgan Stanley, Cargill InvestorServices . . . All of these firms serve asgeneral partners for funds for which weare an advisor. We have focused on U.S.high-net-worth individuals as our keyclient group.

CME: How do you sell your managedfutures programs as an asset class to

these clients?

JWH:The primary benefit of managedfutures is the low historical correlationto traditional assets. Our programs havedone especially well during periods ofmarket stress or dislocation. This iswhen you have strong market trends.Our market selection and our investmentmethodology combine to give a returnstream that is unlike a traditional long-only portfolio of equities and fixed-income instruments.

CME: With the spectrum of instru-ments available,what is your viewabout trading futures instead of cashmarkets specifically, in FX?

JWH: Futures offer a uniformity andtransparency not found in many cashmarkets. That having been said, wehave not been as active in FX futuresmarkets. This is primarily due to theliquidity available in cash FX markets.Nevertheless, we have seen a significantincrease in volume and liquidity at theCME from electronic trading. This iscausing us to reevaluate our trading at

the CME, especially for any activetrading program.

CME: What is your view about tradingfutures rather than equities,exchange-traded funds,the over-the-counter(OTC) markets or other investmentalternatives?

JWH: We have been and remain afutures trading advisor. ExchangeTraded Funds (ETFs) and other OTCmarkets are very interesting concepts,but they are not always liquid enoughfor our needs or are simply too smallan instrument for our trading use.Additionally, the use of ETFs and OTCinstruments strays from our mandate namely, to trade futures that providereturns uncorrelated with traditionalassets. These instruments are good substitutesfor index funds but are not the same astrading an underlying market.

ProgramInception

dateAnnualized return since inception through March 2005

Original Investment Program 10/82

Financial and Metals Portfolio 10/84

International Foreign Exchange Program 8/86

Global Diversified Portfolio 6/88

G-7 Currency Portfolio 2/91

Global Financial and Energy Portfolio 6/94

Dollar Program 7/96

Strategic Allocation Program 7/96

Worldwide Bond Program 7/96

JWH GlobalAnalytics Family of Programs 6/97

Currency Strategic Allocation Program 9/00

10.4%

26.5%

12.9%

16.6%

8.5%

9.9%

8.0%

11.5%

9.9%

11.7%

3.0%

Persistance Pays Off over the Long Run


14/36


CME: What effect have the CME Globex platform and innovations inelectronic trading had on your trading?

JWH: We have tried to remain at the forefront of new technologies. As markets havemoved into electronic execution capabilities, JWH has migrated trading to these

platforms as practical. Internally, we have developed capabilities to interface with theseplatforms, while ensuring the security and accuracy of our trading. We have takenadvantage of electronic trading and will continue to move in that direction. The innovationsfrom CME have made it more efficient to trade these markets.

CME: What are the most significant changes that you have seen in futures trading and inmanaged futures since the early 1980s?

JWH: Electronic trading has been the most significant change in futures trading. It is so mucheasier to access the market and transact trades. The influx of competitors to the managedfutures field has been significant to our industry. There are more managed futures managersand global macro managers who use futures as a means of diversification and profit opportunity.There also has been a shift of emphasis towards shorter time horizons for trading as a result ofthe decreasing execution costs. There is less emphasis on long-term trend-following, which is

our specialty.

CME: What developments do you see coming in futures/options trading?

JWH:Technologys emergence into a predominant position in our industry is something that isongoing in our industry. Another development I see on the horizon is the return of markets that willlook very different from the low-volatility situation to which many traders have become accustomed.

CME: What developments would you like to see in futures/options trading?

JWH: We are constantly looking for new markets to trade. With developments in electronics,the cost of entering new futures markets is much lower. We hope to see new products at CME.We also look forward to new market participants in futures trading. This clearly adds to liquidi-ty, which is good for everyone.

CME: In view of your baseball success in addition to your trading success,we have to ask acouple of baseball questions.What was your baseball background as a player or coach?

JWH: I played second base in Little League. I set a strikeout record at the Chicago White SoxBoys Camp in 1960as a hitter.

CME: What prompted you to get into baseball ownership?

JWH:The investment business can be very insular. Owning a baseball team deeply connectsyou to important aspects of a community. And if you are a sports fan, there can be no greaterdream than to own a team and become a participant. Of course, I dont make player decisions.Im not qualified to run a baseball team. So I am fortunate to have a brilliant general managerand a tremendous CEO.

Buying the Red Soxand winning a WorldSeries with great partners

was a storybook opportunityand a great accomplishment

for an organization that had comeso close over many decades. I owned partof the Yankees for a decade, so I knewexactly what we were up against. Its thegreatest rivalry in sports. Being a lifetimebaseball fan and having a great love formarkets, Im incredibly lucky to have theRed Sox and JWH.

CME: With such success in two diverseareas,what relationship do you seebetween successful trading and puttingtogether a successful baseball team?

JWH:There are a number of dissimilar-ities that people dont want to hearabout. But there are a few principlesthat guide both the Red Sox and JWH.Its important to have a plan, remaindisciplined in executing that plan andpay attention to what is actuallyhappening rather than what you expectto happen. We try to be as objective aspossible in our analyses. Im a sticklerfor that. Some may see objectivity asimpossible. But thats why systematicapproaches make sense.

Its not always easy for people who

are involved every day to stay with aplan when misfortune occurs for a time.You always encounter the unexpected,and this can push discipline right out ofthe way in the name of prudence. Butprudence almost always dictates stayingwith the approach that has made yousuccessful. I see that as one of myprimary roles. I often encourage every-one during diff icult days to be patient.I dont blame people for the unexpected.

Every time JWH struggles and thatis usually annually people ask if themarkets have changed. I always say,Yes, the markets have changed. That isthe nature of markets, and that is why wehave been successful over the long term.The nature of trend-following is to adjustto changing market conditions.

Yes, the markets have changed. That is the nature of markets, and

hat is why we have been successful over the long term. The nature of

trend-following is to adjust to changing market conditions.


15/36

Tight bid/ask spreads, global participation, $40 billion in liquidity each day,

volume growth of 151% over last year and trades backed by the worlds

leading clearing house. Take everything CME FX has to offer and make

the most of it.

Discover how global access can change your world.

CME

FXAccess more opportunit

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

cme.com


16/36

F O C U S

TRADINGFFew markets

have received

more attention

in the last few

years than

foreign exchange

(FX), the worlds

largest market

with transactions

estimated at more

than $1.9 trillion

a day.

XSURGING


17/36

Premier Issue

ELECTRONIC SETTINGFrom Jan. 1, 2002, into earl

2005, the euro appreciated a

50 percent and the Japanese

about 25 percent against the

dollar. Meanwhile, the dolla

was declining about 30 perc

against a basket of major

foreign currencies.

Somewhere in that growing dispa

the relationship between the dol

foreign currencies, more traders

businesses worldwide recognized the n

protect themselves from currency risks

their business operations. Others spottespeculative opportunities after returns

stocks and bonds became less appealin

the stock market bubble burst. The imp

a changing dollar value extends far bey

the FX market. Many of the worlds

commodities from crude oil to soybe

gold are priced in dollars, and the wea

dollar has been a significant contributo

rallies that have taken some commodit

prices to record levels.

As a result of the dollars movemen

role of currency fluctuations has becomclearer than ever before and brought ne

traders to the FX marketplace. CME h

at the forefront of this interest in curren

providing its customers with innovative

concepts and products and making FX

of the fastest-growing areas at CME in

last two years.


18/36

18

CME eFX FUTURES AVERAGE DAILY VOLUMEApril 2000 to February 2005

0

50

100

150

200

250

Averagedailyvolume(thousands)

Ap

r-00

Aug-00

Ap

r-02

Aug-02

Ap

r-03

Aug-03

Ap

r-04

Aug-04

Aug-01

Dec-00

Ap

r-01

Dec-01

Dec-02

Dec-03

Dec-04

Feb-05

CME magazine | www.cme.com

Electronic Spark

FX futures volume has been especially strong on the CME Globex electronic trading platform, more than

doubling since the beginning of 2004 and accounting for more than 90% of CME FX futures volume.

CME FX FUTURES VOLUME1972 2004

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

On the Grow Again

After dipping during the mid-1990s, CME FX futures volume is growing rapidly once again, reaching almost

50 million contracts in 2004.

TFAs the largest regulated marketplace for foreignexchange, CME trades more than 95 percent of allexchange-traded FX products in the world. Thisrepresented a notional value of $6.2 trillion in2004 and accounted for about 5 percent of the

worlds total currency-trading volume. CME notonly trades the well-known currency pairs such as

the dollar versus the euro or Japanese yen but

offers trading in 16 currencies altogether.

Financial institutions, investment managers, cor-

porations 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.

When it all beganInnovation in FX trading goes back many years at

CME. After President Nixon removed the gold

backing from the U.S. dollar in 1971, the pricebands that had governed the relationship of currency

values under the Bretton Woods Agreement for

more than 25 years fell apart, and currencies were

allowed to float.

Responding to this sea change situation, CME,

under the leadership of Leo Melamed, launched

trading in money, the ultimate commodity with

currency futures in its new International Monetary

Markets division on May 16, 1972. Endorsed by

Nobel Prize-winning economist Milton Friedman,

CMEs FX futures provided a way to cope with

the risk of fluctuating exchange rates during aturbulent economic period. As the worlds first

financial futures contracts, they opened the way

to interest rate, stock index and other financial

contracts that now dominate global futures trading

FX trading activity was slow initially, and it

was not an easy sell for Melamed, now CME

chairman emeritus, and others to convince traders

to use this new market. CME gradually got the

message across about the value of FX futures,

especially during the 1980s. FX futures volume

reached 25-30 million contracts annually by the

early 1990s (see On the Grow Again chart, page

18) but then began to fade by the mid-1990s withthe introduction of the Reuters electronic trade-

matching platform and the growth of the interbank

market, as major money center banks set up their

own online network to capture spot currency

transaction business.


19/36

Premier Issue

WHY CME FX FUTURES?

The expansion of the interbank market and blossoming oforex firms have increased participation in the forex markfutures still provide big advantages for trading this mamarketplace. In addition to electronic trading virtually 24 hday, here are some other benefits CME FX futures offer:

CENTRALIZED REGULATED MARKETPLACE. Multiple cotors establish bid/ask prices, all available at one location. Numbuyers and sellers from financial institutions to investmen

agers to corporate officers to individual traders of all sizes cactively, not just one firm or source setting the price or negterms for buying or selling to take place.

AMPLE LIQUIDITY WITH TIGHT, EFFICIENT PRICING.

banks provide around-the-clock liquidity to the CME futurekets. The euro currency quotes regularly showa one-point spread, and the average size of each bid and offer rivals thmarket in liquidity.

TRANSPARENT PRICING. The price you see is what youCME FX futures no relying on bid/ask prices set by one Real-time CME FX futures prices are widely disseminated, playing field is level for all participants of any size. Prices skewed to favor a dealers position as they may be in the ovcounter (OTC) market, where unknown spread costs are finto the private deals. With CME FX futures, all costs are fuclosed. Futures also have a verified record of trading through the CME Clearing House that can provide an audit tthere is no dispute about the price at a given moment.

MARKET INTEGRITY. You do not have to worry about thecial stability of the party on the other side of your trade with because the CME Clearing House acts as the counterparty ttrade. You may lose money on a bad trade, but it will not be banother party did not fulfill its side of a futures transactioClearing Houses performance guarantee enhances liquidvirtually eliminates default risk for CME customers.

LOW EXECUTION COSTS. CME offers flexible pricing plmany customer types. Whether you are an individual investo

prietary trader, bank or professional money manager, CMEcompetitive fee structures based on your membership tvolume. Trading fees for currency futures on CME are comto OTC market prices and, in many cases, less.

FLEXIBILITY. Many equity instruments cannot be solddowntick, and brokerage firms discourage the practice of stocks by imposing fees and other requirements. Like other fcurrency futures have no restrictions on short selling. The pof selling is just as easy as buying. Major currency pairs in also have options available, allowing even more flexible pofor investors interested in more complex trading strategies.

STABILITY. Currencies do not declare bankruptcy, like anor Worldcom. In many cases, fluctuations in CME FX futu

less than in volatile stocks you do not see many one-percent changes in FX values and FX has a reputation for better trending market, where moves usually take time to un

SIMPLICITY. Instead of looking at thousands of compamutual funds and trying to determine which to buy and whenCME FX trading activity focuses on a fewcurrencies, typicallyagainst the U.S. dollar the euro, Japanese yen, British Swiss franc, Canadian dollar, Australian dollar and Mexican

ADINGThose systems, however, were limited to major banks andcurrency dealers. Companies and individuals that were not part

of the existing network were largely shut out of the currency

marketplace. Traders could trade FX futures at CME or cash

forex at a number of new firms that popped up almost overnight.

As an asset class, currencies diminished from 1996 to

2001, says Yra Harris, an independent CME trader, about the

period when investors were more interested in chasing dotcom

stocks. But in a world with twin deficits, geopolitical tensions

and other risks, currencies are an alternative investment source

that can provide exposure to many types of conditions.

Turning to CME FX futuresTo attract traders to the integrity of the exchange-traded

marketplace and to increase FX futures trading, CME imple-

mented a series of initiatives focusing on FX trading and

responding to FX customers needs as the value of the dollar

began to weaken. CME offered customers the ability to trade

CME FX futures on its CME Globex electronic tradingplatform virtually 24 hours a day. Previously available only

for after-hours FX trading, electronic trading in FX began

on a side-by-side basis with floor trading in April 2001,

sparking a resurgence in CME FX trading.

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, page 18).

With the addition of an electronic platform, many who trad-

ed equity or interest rate futures have migrated to CME FX

futures. In fact, in comparing the first 47 months of tradingfor each market, 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, one of the most popular and

successful futures contracts ever offered.

Future growthAs spectacular as CME FX trading growth has been, it

may be just the beginning as CME continues to add ways

to help customers use FX markets. Here are several major

developments that should keep CME FX on a growth path:

CME FX on Reuters. 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-sidetraders that play a significant role in the electronic contracts

traded on CME. The connection brings spot and futures FX

markets together on the Reuters 3000 platform, which puts

CME FX quotes in front of approximately 18,000 FX

professionals worldwide, most of these interbank FX traders.


20/36

TRADING

FX


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, which is used

by about 90 percent of the banks active in FX options.

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. Reuters customerscan now compare FX spot and futures prices quickly on the

same screen and have more execution options for their FX

trading decisions. 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 fastest-

growing marketplaces.

Options on FX futures. CMEs options initiative program

is an exchange-wide focus to expand options trading. While

the graphs clearly illustrate the recent surge in CME FX

futures trading, options on CME FX futures volume has

languished since the mid-1990s (see Room to Grow chart,

page 20). CMEs growth strategy for options is changing thatpicture. For CME customers, that means a broader, more

flexible range of strategies they can use to achieve their

investment objectives.

Part of the process involves the introduction of European-

style options, which can be exercised only on expiration day.

American-style options that can be exercised at any time

prior to expiration have been popular in many markets, but

they are not the type of options used by the over-the-counter

(OTC) market, which has traded European-style options for

many years. CMEs addition of European-style options gives

OTC traders a familiar way to trade electroni-

cally virtually 24 hours a day, not just duringthe OTC market-makers trading day.

In addition, CME FX options bring trans-

parency to the OTC market. 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, not a range

of prices that OTC market-makers might quote.

(For more on CMEs options initiative and FX,

see the technology article, page 26.)

Education. Education at CME involves a

number of different aspects that go well beyondFX, including helping traders make the transi-

tion from floor to electronic trading, where

much of the CME FX trading now takes place

(see the education article, page 34). But for

CME FX specifically, a recent education effort

is directed at the FX retail trader who has been

trading online at a cash FX firm, where the

limited price offerings are often not as good

as FX futures quotes and where counterparty

risk is greater.

To make FX futures understood more clearly by traders

accustomed to trading FX spot markets, CME developed

E-quivalents on its Web site to quote real-time FX futuresprices in spot-equivalent terms. Futures are quoted in dollars

per the foreign currency. For some currencies such as the

euro and the British pound, the quoting conventions are

clear for both spot and futures traders $1.2500 for the

euro, for example.

However, other currencies have different quoting

conventions in the interbank and cash markets. For example,

in futures markets, the Japanese yen is quoted as the dollar

value of one yen 0.009423 (or usually just 9423 on futures

quote screens). In the spot market, the usual quote is in yen

per dollar 106.12, in this example. CME E-quivalents

makes that conversion instantaneously so FX spot traders cantrade CME FX futures in price terms with which they are

most familiar.

CME FX OPTIONS VOLUME

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Room to Grow

While CME FX futures volume has been booming, FX options volume has remained relatively steady since the

late 1990s. But that should change as part of the CME options initiative, which gives customers more flexible

trading choices and could produce dramatic volume increases in the years ahead.

For more information on CME FX on Reuters

visit www.cmeonreuters.com

For more information on CME E-quivalents visit

www.cme.com\equivalents


21/36

Premier Issue

CME now offers weekly expirations for CME Eurodollar one-year mid-curve options, giving traders a new way to take a viewon upcoming economic releases and their effect upon U.S.interest rate markets.

The weekly options expire at the conclusion of trading oneach Friday that is not an expiration day for a quarterly or aserial one-year mid-curve option. That means traders will beable to take a more timely position for key reports such as theU.S. employment report released on the first Friday of everymonth and often a market-moving announcement.

Risk managers now have the opportunity to trade on one ofthe most actively traded CME Eurodollar futures expirations, the

fifth quarterly or first Red contract, meaning a minimumexpirations will always be available.

Traders can also take advantage of several otherdevelopments in CME Eurodollar futures, t he worldactively traded interest rate futures contract:

CME Eurodollar pack spreads and pack butterfly combare now listed on the CME Globex platform, whichenhances the depth and liquidity of the electronEurodollar market.

The maximum permissible order size for selecteEurodollar futures and combinations executed on thGlobex platform has been increased from 5,000 to contracts. (Note: Clearing firms may set different limits.)

Equity index beat goe

CME adds futuresETFs and biotech ind

CME, which already accounts for more than 92 perceU.S. equity index derivatives trading, continues to expequity index product line with new concepts.

First, CME is bringing together two of the most poputrading ideas introduced during the mid-1990s with the of futures on exchange-traded funds(ETFs), which grew up with CME E-ministock index futures. CME launchedfutures trading in June on two of thelargest and most actively traded ETFs:the NASDAQ-100 Index Tracking Stock(QQQQ), widely known as the Qs, andthe S&P 500 Depositary Receipts (SPY),commonly called Spyders. An additionalETF futures contract, based on theiShares Russell 2000 Index Funds (IWM),also was launched.

Trading takes place on the CME Globex

electronic trading platform from 8:30 a.m.until 3:15 p.m. (Chicago time). Futurescontracts are for 100 shares of SPY andIWM, and 200 shares of QQQQ, whichgives the new ETF futures a much small-er notional value of about one-fifth the size of E-mini ETF futures are physically delivered instead of cash-seother CME equity products are.

M A R K E T I N S I G H T S

Insights on CMEPRODUCTS AND SERVICES

More timely trading

CME adds weekly expirationsfor CME Eurodollar options

www.cme.com\eur


22/36


CME FX futures quotes are rea more global audience thes

with CME FX on Reuters coto add more clearing firm

service to the Asia Pacificas well as SuperDerivnow offering real-time prCME European-style eand Japanese yen option

SD-FX platform.CME FX on Reuters (see

article on FX, page 16) providelink between spot and futures

on the worlds leading FX desktopthe venture between SuperDerivatives and CME pa bridge for greater price transparency between ovcounter and exchange-traded FX options markets. Thousadditional traders are now seeing CME FX quotes, the dliquidity available and the size of the CME FX futuroptions market.

CME FX on Reuters is the first major link between straders in the interbank FX market and electronic Cfutures markets, where hedge funds and other major bparticipants play a major role. CME FX futures quotes apspot-equivalent terms on the Reuters Dealing 3000 simplifying usage for cash-market participants who can ccash and futures market pricing and take advantagebenefits offered by futures.

SuperDerivatives SD-FX options pricing system isregarded as the FX markets benchmark, with around 90 of the banks active in FX options using the platform. In to current price quotes, SuperDerivatives users will also to view indicative volatility levels for CMEs FX options co

This can be critical information for FX options traders as market price for even plain-vanilla options can deviate stially from the theoretical value produced by Black-Schomodels. The SD-FX system gives users a way to comparon FX futures and over-the-counter markets, which are qdifferent ways.

SuperDerivatives will also add functionality to allow custo buy and sell CME FX options contracts through SD-second phase. Currently, most of the trading in the largand sophisticated FX options market is concentratedover-the-counter market.

Bloomberg also is offering the ability to trade CME FXin spot equivalent terms on its Tradebook platform. JuCMFX and on Bloomberg, and you will see exeprices on all CME currencies in spot-equivalent

Bloombergs application allows you to enter your own points as well as view indicative rates from forward adealers who participate on the Bloomberg platform. In aBloomberg also is offering all CME FX options on products on their platform, both American- and Europeawith the ability to view prices in premium and volatilityterms, with executable functionality.

Like a number of financial markets, electronic trading in CMElivestock futures has seen some sharp increases since amarket-maker program was introduced in January.

Five market-makers are actively posting continuous bids andoffers in live cattle, feeder cattle and lean hog futures, which aretraded side-by-side with the CME livestock products traded onthe floor during the regular trading session (9:05 a.m. open forcattle, 9:10 a.m. for hogs until 1 p.m. close, Chicago time).

By providing transparent and competitive prices, the market-makers expand opportunities for all participants. Several groups ofnew users, including brokers and institutional traders, are trading

the electronic livestock markets, further helping to build liquidity.As with other electronic markets, trading CME E-livestock

futures provides traders with immediate, current information,including an on-screen view of best bids and offers, quantitiesand depth of liquidity. CME E-livestock traders also have greatercontrol over the entire trading process with one-click execution oforders and instantaneous knowledge of their positions.

Joining the electronic movement

E-livestock tradingon the rise

More quotes, more pl

CME FX on ReuteSuperDerivatives, Bloomb

20,000

15,000

10,000

5,000

0

CME E-Livestock Volume

Contracts

January2005

February2005

March2005

CME E-mini and ETF futures complement each other in theportfolios of sophisticated individual investors. ETF futures, likeall futures, allow investors to take a short position without havingto borrow shares from a broker, which is necessary to sell shortsecurities or ETFs.

A second addition to the CME equity index product line arefutures and options based on the NASDAQ Biotechnology Index(NBI), scheduled to be launched in September on CME Globex and

traded almost 24 hours a day. These new contracts are the firstfutures designed specifically to hedge risk in the biotech sector.

NBI includes more than 150 component stocks covering thebiotechnology and pharmaceutical industry, one of the mostdynamic investor sectors in todays marketplace.

www.cme.com\etf

www.cme.com\e-livestock


23/36

C O N N E C T I O N S

Premier Issue

Prominent

Perch

A

In the Investment World

With an emphasis on electronically traded markets,

Citadel Investment Group L.L.C. may well be the prototype

for investment firms in the future.

Two key Citadel

staff members,

Matt Andresen (with tie),president of Citadel

Execution Services, and

Jason Lehman, head of

global volatility arbitrage,

discuss strategies.

CITADEL INVESTMENT GROUP


24/36


We have a strong preference for trading contracts that aretransacted on an electronic platform, says Matt Andresen,president of Citadel Execution Services.

Founded by then 22-year-old Ken Griff in in 1990, Citadel

has become a phenomenal success story in investment man-agement and related services in just 15 years. Overseeing morethan $12 billion in investment capital, Citadels affiliate, CitadelLimited Partnership, is now one of the largest managers ofprivate capital in the world. Since 1998, Citadel has createdbetween $4 billion and $5 billion in value for its investors,more than the total amount of capital the firm had undermanagement in 1998.

Role modelWith a stellar track record like that, it is no wonder that

Citadel is held in high regard by the investment world andwhy others might want to copy Citadels path in the future.

Technology and electronic trading have played a major rolein Citadels success.

What differentiates us is the integration of our exceptionaltalent and sophisticated technology, which enables us torespond quickly and successfully to market developments andinvestment opportunities worldwide, says Andresen, formerchief executive officer of Island and former chief operatingofficer of Instinet. We are relentless in our execution.

Citadel has always been committed to investing intechnology, adds Jason Lehman, head of global volatilityarbitrage at Citadel. We believe that electronic markets areinherently faster, more eff icient and fairer. Therefore, weinvest in markets that offer the superior electronic model forquoting and execution. Our trading inevitably increases asmarkets become automated.

That suggests that Citadels presence at CME will beeven greater as CME continues to expand its electronic

trading capabilities.Citadels activity in CMEs option products is directly

correlated with the transition to an electronic trading plat-form, Lehman notes. As more products are migrated toa robust electronic market, Citadels daily volume in theseproducts will likely grow exponentially.

One example of Citadels emphasis on technology is inthe composition of its employees. Of the approximately 1,000

people that Citadel currently employs at its headquartersin Chicago and offices in London, Tokyo, San Francisco andNew York, about 500 are IT professionals versus approximately300 investment professionals.

Citadels world-class team of investment professionalsincludes former college mathematics professors, astrophysi-cists, specialists in string theory and even meteorologists inkey trading and research positions, Andresen says. Theirquantitative research develops new trading strategies andupdates old models as they seek high risk-adjusted returnsfor investors through a disciplined, multi-strategy approachto global markets.

Meticulous research and rigorously designed tradingstrategies that emphasize controlling risk have brought Citadelconsistently strong returns over the years. For example,Citadels flagship Wellington fund, the fund Griff in startedin November 1990 with $4.6 million, has experienced anannualized rate of return of more than 25 percent fromJanuary 1, 1998, to March 2005.

More than a hedge fundCitadel is often characterized as a hedge fund, but its

business extends far beyond just that area, both in the natureof its investments and in its geographic scope.

In many ways, we have begun to transcend what is com-monly viewed as a hedge fund, Andresen comments. Weallocate our investment capital across six major investmentstrategies and participate in virtually every major asset class.Within each of our strategies we combine fundamental anal-ysis with the use of advanced technology and quantitativeresearch to drive superior risk-adjusted returns.

Since its founding in 1990, Citadel has expanded anddiversified the strategies it oversees to cover all major assetclasses. Citadel today is a highly diversified company with

six major lines of business:

Global Value InvestmentsGlobal Markets and Quantitative StrategiesGlobal CreditGlobal EnergyGlobal EquitiesGlobal Interest Rates

After creating $4-$5 billion in value for its investo

since 1998, it is no wonder that Citadel is held in hig

regard by the investment world and why others mig

want to copy Citadels path in the futur


25/36

Premier Issue

Investors in Citadels world-class operation include majorcorporations, foundations, endowments and pension fundsas well as other institutional investors who are attracted toCitadel funds because of their record of consistentlygenerating high risk-adjusted returns.

Technology baseCitadel has a strong track record of using its technology

to move quickly to take advantage of market developments,going back to Griffins early days after founding the firm. In2002, for example, Citadel entered the energy trading businessto fill the void in the market following the difficulties in themerchant energy business.

Citadel has spent 14 years developing broad and deep

expertise in technology and in quantitative research that isfully integrated into our trading and investment businesses,Lehman says. These skills are the generator for the firm.We are always looking for new opportunities to apply theseskills, just as you might hook up additional appliances to agenerator. Our entry into options market making is a greatexample of this.

Citadel uses a number of CME products to express atrading view and to hedge risk, he adds. Liquidity and marketintegrity are strong considerations in our decision to tradethese products.

Low-key leaderDespite his prominent role in investment fund management

and a record of consistent success over the years, Griff in

maintains a rather low profile. Putting together a convertiblebond arbitrage model and starting to trade from his dormitoryroom at Harvard College in the late 1980s just in time to beon the short side of the October 1987 stock market crash Griff in jumped into Japanese equity warrants, European con-vertible bonds and other investment areas as he identified andexploited new market opportunities. But instead of publicizinghis own name with each successful venture, Griff in hasfocused on building teams within the organization to sharethe credit for achieving successful results.

That may seem a bit unusual for the head of a firm thatcurrently accounts for approximately two percent of the totaldaily dollar volume traded on both the New York StockExchange and NASDAQ. Citadel Derivatives Group LLC, anaffiliate of Citadel, is also a leading market-maker in listed

options in the United States.We place a tremendous emphasis on leadership development

and have worked diligently to avoid a star culture, Andresenexplains. Instead, we stress the critical importance of team-work by outstanding individuals, all committed to learning,excellence and winning. Ultimately, this commitment gives usthe internal capability and resources to capitalize swiftly onnew opportunities around the world.

Citadel has a strong track record of using

its technology to move quickly to take

advantage of market developments.


26/36


Nowhere is the technology emphasis moreevident at CME than in its Enhanced Options System (EOS).A key element of the exchanges options growth initiative,

EOS is a major technological step forward that will help customersuse sophisticated, flexible trading strategies and increase electronictrading in CME Eurodollar options. Ultimately, EOS also will beapplied to CME E-mini equity index and CME FX options marketsas well.

ENTHUSIASTIC RESPONSEI am very excited about the future of EOS, says Will Hobert, manag-ing member of WH Trading, a market-maker firm in CME Eurodollarfutures and options.

E D G E

Provides thePerfect Match

Advances in

technology have

had a significant

impact on almost

every business in

the last 10 years,

and that universal

trend is certainly

reflected in trading

developments at CME.

TECHNO

OPTIONTECHNO

OPTION

Trading andTechnology:

Provides thePerfect Match


27/36

Premier Issue

Hobert traded currency options and CME Eurodollarson the floor for 14 years before moving to the computerscreen to concentrate on CME Eurodollar futures andoptions in 2003, so he is well aware of the changes intrading as a result of EOS. The trader will still have to

have strong intellect, but EOS will change the dynamics ofthe trader of the future from needing a strong pit presenceto having an affiliation with a good programmer, he says.

Electronic trading is the future, agrees Don Kuster,managing director of Citigroup Derivatives Markets Inc.,a proprietary trading operation that also is a market-maker for CME Eurodollars options traded in the pit and

via EOS. The main driver is transparency. And electronictrading is faster and anonymous. Its here to stay andwill get even more robust as more people get used to it.

The significance of developing technology to trade

options at CME can be seen in volume numbers: Morethan 70 percent of CME futures products are now screen-traded, whereas less than five percent of CME optionsproducts are screen-traded. So there is plenty of room foroptions growth at CME. To drive that growth, CME is:

> Continuing to implement technology to support theright market models for electronic options trading;

GY

SGY

PHOTOGRAPHER H. Prinz/C


28/36

> Increasing market-making to facilitate liquidity;> Conducting an extensive marketing and education

program; and,> Working closely with 22 independent service ven-

dors to facilitate options trading on its CME Globexplatform, including efforts to establish industry-widestandards to distribute data.

FROM FUTURES TO OPTIONSFutures themselves require sophisticated technology tomatch orders online instantly and to disseminate priceinformation, but when it comes to options on thosefutures, the technology challenge grows exponentiallybecause of the nature of the instrument for differenttypes of markets. And everything must be done in a

timely manner that is, in milliseconds must bereliable 24 hours a day and must be cost-efficient.

Bids, offers and trade prices change constantly infutures, but most futures markets have active trading inonly a relatively small number of contract months.Therefore, matching buy and sell orders in futures is arather straightforward process, even on a volatile day.

Options, on the other hand, add several wrinkles tofutures that increase their complexity:

CALLS OR PUTS. Traders do not just buy or sell at amarket price but buy or sell the right to be long (call) orthe right to be short (put) at a specific price, so thisimmediately doubles the number of quotes.

STRIKE PRICES. Depending on the recent range ofprices, call or put options may be available at dozensof strike prices on either side of the current price.

MONTHLY EXPIRATIONS. Most financial futures have

quarterly expirations (March, June, September,December). Options are available for all months includ-ing the interim months July and August options basedon the September futures contract, for example multi-plying the number of choices.

OPTION SPREADS. Because options are used bymany mathematically oriented traders employingvarious risk models, customers look not only for bid/askquotes on outright calls or puts at different strike pricesbut also for quotes on spreads between options.

Every change in futures prices may mean changes inthe options bid/ask prices for every option based oneach futures contract. Instead of two messages in and

out for futures, options may involve 80 messages.

TAILOR-MADEIn addition, the requirements for each product area aredifferent, so CME has to provide electronic features forthree different types of trading communities.

Eurodollars, for example, are based on a call-aroundtradition. Hobert, for one, is not a fan of the Europeancall-around market because he says he could not relyon what he was told on the phone. It was usually inthe best interests of the caller and not me, he notes.

CMEs electronic platform currently replicates thedealer network by posting electronic requests forquotes to which market-makers respond with two-sidedbids and offers and size without having to call aroundfor quotes. Introduced in August 2004, the first phaseof the EOS makes it crystal clear what the bids andoffers are, Hobert points out.

You dont have to call the floor constantly to get bidsand asks. Theyre right there on your screen, open and

Foreign exchange

models are usually based

less on price than on risk,

which is a factor of

volatility. So CMEs elec-

tronic platform for FX has

to be focused on making

the translation between

volatility and price.


>>>


29/36

Premier Issue

transparent to all, Kuster says,adding that his firm does have threepeople in the pits. He expects elec-tronic and pit options trading tocontinue side-by-side for a long time.

THE FUTUREIS NOWAlthough EOS is still evolving tofacilitate institutional trading, Kustersays traders can already do prettymuch what they want with optionstrategies on EOS. About 90 per-cent of what is done in the pit isprobably available online now, hesays. When we went through ourdaily trade logs recently, there werevery few trades we were not ableto do on EOS.

Ultimately, EOS will be able tohandle all kinds of orders. CME

Eurodollars have options repre-senting 10 years across 40 con-tract months, so users can tradethe full interest-rate spectrum. Eachcontract has calls and puts at multiple strike prices.Then there are almost innumerable combinations ofoptions that traders can conceive to accomplish anobjective, and bids and offers are changing constantly.It takes more than 80,000 instruments or parametersto define the CME Eurodollar options trading process,far more than for other CME Globex markets. EOS willhold bids and offers for all of these situations and pro-vide a continuous flow of indicative quotes and datathat will be available to all traders.

It is the equivalent of having thousands of differentpits and market-makers, Hobert remarks.

Foreign exchange models are usually based lesson price than on risk, which is a factor of volatility. SoCMEs electronic platform for FX has to be focusedon making the translation between volatility and price.

MASSIVE QUOTINGThe additional elements required for all of these differentoptions involve massive quantities of data, and anytrading platform designed for options requires featuresand functionality not needed with futures.

Technological enhancements this year will expandaccess from a closed system with only a CME-providedfront-end to open access via the CME Globex platform,and will increase the number of market-makers andindicative quotes for outright and spread combinations inCME Eurodollars. These advances in CME technologywill soon allow firm-quoting functionality for straddlepositions, in addition to the implied in and out bids andoffers for calendar and butterfly spreads launched last year.

Mass quoting capability also is a technology focusfor CME equity index and foreign exchange options thisyear as more market-makers are designated for thesemarkets and the volume of quotes increases.

The universe of CME FX participants who tradeelectronically has broadened to more sophisticatedend-users such as currency overlay managers, hedgefunds, proprietary trading shops and retail traders whouse algorithmic trading models, and CME has added anumber of clearing firms for CME FX on Reuters as

well as service in the Asia Pacific region. Integratingcash and futures FX markets with CME FX quotes onReuters means that CME has to rely on technology toprovide efficient trading solutions for the anticipatedgrowth in volume.

RESPONDING TO CUSTOMERSThe whole process of what technology CME needs toprovide begins with the customer, who typically is lookingfor immediate market access, market transparency andcompetitive price discovery and liquidity. Users meetwith CME officials regularly to review the exchangeslatest developments and react to what they like or donot like. This feedback, together with requirementsfrom operations regarding transparency and visibility,helps CME with its plans for future growth. The planningperiod may be as long as several years. CME mustprepare for trading business well before it arrivesbecause the lead time for acquiring equipment andplacing it in service may be months.

CME Electronic MigrationAverage Daily Volume - Total Exchange

1Q04 2.8M

1Q04

* Shareof total valuetraded electronically

2Q04 3Q04 4Q04 1Q04 2Q04 3Q04 4Q04

CMEInterest Rate Products* CMEForeign Exchange Products*

2Q04 3.3M 3Q04 3.2M 4Q04 3.1M 1Q05 3.9M

0

20

40

60

80

100

0

20

40

60

80

100

Percent

Percent

11%

28%

44%52%

1Q05

51%60% 64%

67%72%

1Q05

76%

51%48% 47%

52%38%

61% 31%67%

32%66%

51%48%

1%

47%52%

38%61%

1%

31%67%

32% 66%

CME Globex Privately Negotiated

2%

www.cme.com\options


30/36


P L A T F O R M

CHA GROWTH OPPORTUNIT

Everything about China seems to be growing, including its prosp

for derivatives markets that could accelerate their developmen

collaborating with established global exchan

derivatives in

CHINAS GDP HAS OUTPERFORM

Craig S. Donohue Chief Executive Officer CME


31/36

Premier Issue

INCORD OF SUSTAINED GROWTH IN ANY OTHER COUNTRY AT ANY TIME IN HISTOR


32/36


P L A T F O R M

China is a rising economic force (see Power to the

People chart, page 32). Thats hardly news to

anyone who follows global economic statistics

or stories in the media. Despite attempts to

rein in economic growth because of concerns

about an overheating economy, Chinas real

GDP rose 9.5 percent in 2004, an increaseover its 9.1 percent growth in 2003, according

to Chinas National Bureau of Statistics. Even

with a more controlled growth program, officials

expect the same type of expansion for the next few years.

As a result of this growth, Chinas shares of world manufacturing and worldexports have grown dramatically in the last 15 years while U.S. andJapanese shares have declined (see China on the Move charts, page 33).

From corn to copper, from cement to crude oil, China has become a dominantforce in the world marketplace for commodities of all kinds. Its imports of crudeoil in 2004, for example, were up 33 percent from the 2003 level, and demand

is expected to grow on a pace that nearly matches projected U.S. growth in oilimports in upcoming years (see Oil Flows chart, page 33).

With a population of 1.3 billion, China has a labor force that is seven timeslarger than the U.S. labor pool. China will continue to emerge as not only asource of lower-priced labor for manufactured goods but also as a fertile areafor increased consumer expenditures, which currently account for only about39 percent of Chinas GDP vs. 70 percent in the United States.

NEXT STEP: DERIVATIVESThe promise of Chinas continued economic expansion offers valuable opportunitiesto develop its derivatives markets for hedging and risk management of financialexposures. My experience suggests that such derivatives markets are essentialadjuncts to fuel Chinas further economic growth. Access to global interest rate,stock index and foreign currency futures and options contracts will provide

Chinese banks, corporations and financial institutions with valuable hedging andrisk-management tools necessary to preserve the economic benefits of Chinasincreasingly free and growing market economy.

China faces fundamental challenges relating to credit and monetary policies,property rights, resolution of financial failures and defaults, the free flow of accuratemarket and financial information, and the adequacy of corporate disclosure andaccounting standards. These issues are well understood within China and arebeing addressed.

Since 1980, Chinas gross domestic product (GDP) has grown

nearly 8 percent per year...

}

4,580

4,071

3,562

3,053

2,544

2,036

1,527

1,018

509

0

1975

1980

1985

1990

1995

2002

2000

Power to the People

Source: Globalis

U.S.

dollars

With a populat

1.3 billion, Chin

a labor force th

seven times larg

the U.S. labor

Chinas gross domestic

product per capita figure

has grown sharply in the

last 25 years.


33/36

Premier Issue

Other unique challenges relate to the establishment ofsuccessful derivatives markets, such as those tradingfutures and options on futures:

Chinese exchanges must ensure that allparticipants have equal and immediate access toaccurate and fully transparent market information.

These exchanges must ensure standardizedpractices and rules for market participants, andhave the ability to detect, deter and punish individualsor entities that engage in practices that can lead tomarket manipulation or unsound business practices.

Chinese exchanges must guarantee the financialperformance of all transactions in their markets, aswell as the safety and soundness of the related banking,settlement and custodial functions necessary to supportmarket transactions.

These three fundamental requirements are bestaccomplished by close cooperation between the govern-ment and private sector entrepreneurs. Governmentshould strive to create an environment that requires

exchange directors and managers to take full responsibilityfor all business decisions, subject to strong incentives tooperate efficiently and honestly.

EXCHANGE LINKSAnother challenge facing China is how best to gainentre to the global capital and financial markets.This can be accomplished by Chinas exchangesopening up to investment, joint venture and commer-cial business arrangements with other globalexchanges and intermediaries. This approach will bemost advantageous as the global derivatives markets,such as those trading futures and options on futures,

increasingly standardize and consolidate to meetusers and intermediaries demands for loweroperational costs and greater capital efficiencies.

China can develop its derivatives market infrastruc-ture successfully by concentrating on product develop-ment, economic analysis and the creation of soundmarket regulation standards, and by engaging in edu-cation and training efforts to ensure the prudent use ofChinese financial and agricultural derivative contracts.These efforts can and should be undertaken from within.

However, Chinas exchanges can accelerate theirgrowth by collaborating with global exchanges toutilize their extensive infrastructures, trading and

clearing platforms, and industry-standardized businesspractices. Mutually beneficial partnerships will helpbroaden the distribution and reach of Chinas derivativesmarkets, just as the advantages created by leveragingestablished non-Chinese equity capital markets withglobal reach are clearly complementary to Chinassovereign interests in further developing, over time,its own global equity capital markets.

Although Chinas markets may face periods ofuncertainty in terms of global investment and expansion,this uncertainty should be embraced as an unavoidableand even positive feature of dynamic market economies.Changes forthcoming in Chinese derivatives marketswill create new opportunities to extend the rapid pace

of economic growth unleashed by the countrys historicmove toward a market economy.

They also would create new opportunities for traders,whether seeking speculative profits or hedging risks, totrade Chinese markets as readily as those in the UnitedStates, Europe, Japan and elsewhere.

China on the MoveShare of the World of Manufacturing Share of the World's Expo

Percent

35

30

25

20

15

10

5

0

Percent

20

15

10

5

0

1980

1985

1990

1995

2000

2003

1980

1985

1990

1995

200

US Japan Germany China

Source: Global Insight

Millionbarrels/day

US China WesternEurope

Japan

8

7

6

5

4

3

2

1

0

Source: U.S. Energy Information Administration

Oil FlowsGrowth in Demand for Oil

2000-2001

China will nearly match the United States as a dominant driver of additional

demand for oil over the next 15 years.

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.S. and Japan shares are declining.

www.cme.com\china


34/36


Education

@CME.

WHERE TRADING BEGINS

CME, the largest U.S. futures exchangeand the first to be publicly traded,offers a variety of educational oppor-tunities to traders, whether they aremaking the transition from open-outcrypits to electronic trading, trying tolearn technical analysis for the firsttime or developing knowledge andskills to trade on an institutional tradingdesk. CME has offered classes abouttrading for a number of years but tookits education program a huge stepforward in March 2004 with the opening

of the CME Globex LearningCenter(GLC). The GLC is the worlds firstand only electronic trading trainingfacility, illustrating CMEs role as aglobal leader in financial services andtechnological innovation.

CME developed the GLC after amember survey, focus groups andextensive studies by the exchangesElectronic Transition Committeerevealed a need to help its membersmake a smooth shift from floor toscreen trading. It also would prevent any

drop in volume and liquidity such asoccurred on some overseas exchangeswhen they changed from open-outcryto electronic trading overnight.

CMEs business strategy for educationand the GLC includes several facets,accordingto DeBorah Lenchard, associatedirector of CMEs education programs:

Providing a physical locationwhere traders can literally walk offthe trading floor and learn aboutelectronic trading without financialrisk.A GLC classroom with computerstations lets traders experience real-time trading in a mock environmentusing the latest software provided by anumber of independent software part-ner vendors (ISVs) as well as newsand data quotes fromCME, the ChicagoBoard of Trade and other

partner vendors.Individuals or groups oftraders from firms oruniversity classes can tryout and compare manyprograms all in one loca-tion. Additionally, theycan print out their profitand loss statements tokeep track of their trad-ing progress.Making traders more familiar andcomfortable with technology,which

is playing a bigger role in tradingevery day.This includes training onthe CME hand-held units used in thepits and gives traders a chance topractice in a simulated trading setting.Giving traders as many classes aspossible on a wide range of topics.This includes online classes available

to anyone in the world and morethan 30 on-site classes available inCME classrooms.The online offer-ings are primarily trading foundationcourses as well as the upcomingElectronic Trading 101, which willinclude links with partner firms forsimulated trading. Classes are scheduledto expand into a broader range oftopics during 2005 as will the numberof webinars offered by CME staff andknowledgeable industry experts. Theclassroom classes are usually offeredafter the regular trading session, andsome are available on weekends. Anumber of the classes include labtime, which allows students to blendtheory with practical applications on

the computer sta-tions in the GLC.Converting

CMEs traditionallibrary into a total-ly interactiveInformationResource Center,where traders haveaccess to books,publications, Websites and otherresources.The GLC has

already logged thousands of visits,and hundreds take CME classes,either online or in the classroom,every year. For more details aboutclass subjects, instructors and aschedule of current classes, go towww.cme.comand click onEducation.

IF THERE IS ONE THING ANY TRADER NEEDS TO BE SUCCESSFUL,

it is confidence in what he or she is doing. That confidence does not come from

predicting market movement but from preparing for market movement, whatever that

may be. For most traders, acquiring that confidence requires education or training to

become comfortable with new or different situations, especially in an endeavor as

fast-paced as futures or options trading.

A T Y O U R S E R V I C E

www.cme.com\education

CME Chairman Terry Duffy (right) with Vice

Chairman Jim Oliff, presenting in CME Globex

Learning Center at Chicago headquarters.


35/36

Premier Issue

CME Magazine

CME

20 South Wacker DriveChicago, IL 60606-7499312-930-1000 tel312-466-4410 faxwww.cme.com

[email protected]

Senior EditorsAnita Liskey, William Parke

Editorial Advisory Board

Tim Doar (Clearing), John Hara(Commodity Products), Bryan H(Foreign Exchange Products), D(Equity Products), Lynn Lipsig (MRay McKenzie (Foreign ExchangPamela Plehn (Product Public RDavid Prosperi (Corporate PublRobin Ross (Interest Rate ProdAllan Schoenberg (Technology P

CME Magazineis published by conjunction with Penton CustomAll rights reserved.

Penton Custom Media

1300 E. 9th StreetCleveland, OH 44114216-696-7000 tel216-931-9441 faxwww.pentoncustommedia.com

Editorial Director

Darrell Jobman

Art Director

David Bosak

Do you have a question forCM

E-mail us at [email protected] withand comments, or to be added t

from the mailinglist.Further information about CME and itable on our Web site at www.cme.comavailable on our Web site does not codocument.

The Globe logo, Globex, Chicago MeCME, E-mini, Galax-C and E-qumarks of CME. All other trademarks their respective owners. S&P 500,and Standard & Poors Depositary Rmarks of Standard & Poors, a divisionCompanies, Inc. The NASDAQ-100 IIndex Tracking Stock and QQQ are reof The Nasdaq Stock Market, Inc. ause by CME. The Russell 2000 Indtrademark of Frank Russell CompiShares Russell 2000 Index Fundof Barclays Global Investors. SupeSuperDerivatives logo and SD-FX

SuperDerivatives Inc.

All matters pertaining to rules and specmade subject to and are superseded bCurrent CME rules should be consultcerning contract specifications.

CME 2005

CME Magazine is printed on recyc

Introductory Principles of Futures, 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, 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

CME Education OpportunitiesIn addition to the classes listed here, CME also conducts seminars atlocations around the world as well as webinars available on the Internet,sometimes in conjunction with partner brokerage firms or partner vendors.

On-Site Classroom CoursesCME 20 S. Wacker Drive Chicago, IL 60606-7499 312-930-1000

Technical Analysis (7 sessions)

August 2-23: (Tuesdays and Thursdays) 4:00 p.m.- 6:00 p.m.Instructor: Ken Shaleen | Cost: $320

Market Profile Trading Strategies (2 sessions, seating limited to 24)

August 6: (Saturday) 9:00 a.m. - 5:00 p.m August 8: (Monday) 12:00 p.m. - 3:00 p.m.Instructor: Dan Gramza | Cost: $250

Principles of Futures, Part 2 (5 sessions)

August 9-23: (Tuesdays and Thursdays) 4:00 p.m. - 6:00 p.m.Instructor: Larry Schneider | Cost: $220

Introduction to Screen and Pit Trading (1 session)

September 10: (Saturday) 9:00 a.m. - 1:30 p.m.Instructor: Mickey Hoffman | Cost: $150

Electronic Trading Strategies (2 sessions, seating limited to 24)

September 10: (Saturday) 9:00 a.m. - 5:00 p.m. September 12: (Monday) 12:00 p.m. - 3:00 p.m.Instructor: Dan Gramza | Cost: $250

Options for Beginners (5 sessions)

September 13-October 11: (Tuesdays) 3:30 p.m. - 5:30 p.m.Instructor: John Nyhoff | Cost: $200

Technical Analysis Options Strategies

November 15, 16, 17, 21, 22: (Tuesday, Wednesday, Thursday, Monday, Tuesday) 4:00 p.m. - 6:00 p.m.Instructor: Ken Shaleen | Cost: $200

Following is a complete list of CME on-site classes available at various times. For a currentschedule of all classes, courses and seminars or more information about any of the items

listed, go to www.cme.com\edu or call 312-930-6937 or e-mail [email protected].

To view CME Magvisit www.cme.com\


36/36

20 South Wacker Drive

Chicago, IL 60606-7499

CME E-mini S&P 500, 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, anytime day or night.

Discover how more opportunity can change your world.

CME E-MINITM OPTIONS ON FUTURES

CME, the globe logo and Chicago Mercantile Exchange are trademarks of CME. S&P 500 is a registered trademark of the McGraw Hill Companies. NASDAQ-100 is aregistered trademark of The Nasdaq Stock Market, Inc., used under license. The Russell 1000 Index and Russell 2000 Index are registered

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