Financial Markets

Much of the innovation in exchanges and derivatives has come from Chicago – not New York or London. Once best known for derivatives in farm products – cattle, hogs etc. _ Chicago leads the rest of the world in innovating and dominating in the trading of derivative products(options, futures, commodities etc), symbolised by the emergence of the Chicago Mercantile Exchange(CME) as the ‘hottest exchange’ in the world.

From the Chicago Tribune :

Chicago’s success can be attributed in part to something economists call New Growth Theory—new work comes from innovation. Unlike labor or capital, which are fixed goods, innovation and ideas cannot be used up. As awareness of new ideas spreads, they lead to economic growth.

One good example: Chicago’s futures markets. In the early 1970s the Chicago Mercantile Exchange began to trade derivatives—financial assets that derive their value from other assets. Leo Melamed, the chairman of the CME at the time, realized that a floating dollar would create uncertainties and businessmen would want to hedge this risk. The result: creation of the International Money Market, the world’s first financial futures exchange, which traded on the future price of the dollar. A few years later the Chicago Board of Trade began to trade treasury-bond futures. Today, more than 85 percent of the world’s derivatives are traded with the exchanges of the CME Group. The hog butcher to the world, it’s been said, has become the world’s risk manager.

This has spun other economic growth. The trade in futures products created more need for financial and legal services, which created more jobs.

And Chicago’s markets keep innovating. The Chicago Climate Exchange is becoming the place to trade carbon emissions in the U.S. This city is poised to be a major center in the business of environmental protection.