Today, 70% of the CME's Eurodollar trades are completed electronically. In addition, the company has eclipsed the competition and now controls 98% of the market. Here's how CIO James Krause and his business colleague, Richard Redding, director of products and services, worked together to develop the system and -- even more importantly -- keep it flexible to adapt to changing business conditions.
You two speak different languages, the language of technology and the language of trading. How do you bridge that gap on a project like this?
Krause: My first couple of years here, that was an issue. But after that, when I got into the electronic trading, I met with a lot of traders. In the last 10 years or so it hasn't been a problem.
Redding: I had the opposite experience. When things were traded on the floor, I didn't really have to know that much about technology because even if the markets were traded at night, speed, reliability and performance were not much of an issue. I needed to spend my time learning why people trade and understanding what they need.
Had you done a lot of work together prior to this?
Krause: When we first developed the electronic trading system, it only operated overnight, so we had [traders in] the pit [buying and selling] during the day, and this was just a complement. When we got into trading equities, that was when we started working together. At that point it became a real-time market. That is when you get into issues with reliability, speed and performance. If the New York Stock Exchange is moving, our S&P 500 has got to move with it.
What did you do that encouraged so much more trading last year?
Krause: Due to the complex nature of trading interest rates, in the past the trading pits provided the best environment to trade Eurodollars. With 40 contracts spread over 10 years, it used to be very complex to apply that market to the electronic environment. But we've been able to overcome those barriers in the past 18 months.
Redding: If you look at how people traded the Eurodollar a year ago versus today, it is completely different. When people started trading electronically, they sat there with a mouse and moved the mouse and clicked and changed the market. Now we're at the other extreme where there is no human intervention. They program algorithms and trade in a black-box fashion. That creates a completely different set of issues. Nothing ever is built. It is more of an evolution alongside how the market evolves.
Chicago Mercantile Exchange |
|
Revenue: $752 million CIO: James Krause Business colleague: Richard Redding, director of products and services Working together: 17 years IT/business challenge: Generate new revenue by boosting online trading of the Eurodollar. Upshot: By collaborating closely with the business side, IT developed a system that adapts to traders' changing strategies. |
How up to speed were you on the Eurodollar and other products here before this process began?
Krause: I started in 1987. I've been meeting with the traders and others on the business side since then. It's almost 20 years' worth of experience. Have I ever traded? No, I've never traded. That's probably a good thing, too. But over time you understand what traders are talking about. Now it's a matter of translating that into efficient technical design.
Redding: That is an important point. Jim's been here 20 years. I've been here 17 years. The important thing is for the IT guys to understand the business side because development happens a lot faster when we don't spend all of our time sitting at meetings explaining every little nuance of the market. To take an IT guy and put him in front of a trader and the trader says, "I want the fly to trade like this," well, what's a fly? You have this whole long process to get them up to speed.
So, a lot of it has to do with the fact that Jim and some of his key IT people have been around for a while and actually understand what the business is, not just the application. [Note: A fly refers to a butterfly spread, a mix of bought and sold Eurodollar futures contracts executed across three expiration months. When plotted on a diagram, it looks like a butterfly.]
Where did the decision to move Eurodollar to electronic trading come from?
Redding: We saw a huge migration to electronic trading with the S&P [500 index], and we were seeing it in the foreign exchange product as well. We started to see it slowly happen in Eurodollar. Over time the products went electronic more quickly, so we thought that the Eurodollar would go electronic very quickly.
There were also some competing products out in the marketplace that we needed to respond to.
So at that point you sat down to talk?
Redding: Actually, long before that. Jim's been doing this a long time. He understands the Eurodollar market as well as anyone.
Krause: Not only do we work with Rick and the product guys, but then they take us out and introduce us to a lot of traders and also the technical guys that support those traders in their environment. That way we can have both the business and the technology discussion.
This was first published in March 2005