Good Derivatives: A Story of Financial and Environmental Innovation

Chapter 2

Trying to Change the World

Launching an Electronic Futures Market

For the times they are a-changin'.

—Bob Dylan, 1964¹

As a college student, I used my understanding of odds and knowledge of chess to play poker and bet on horses. I applied these same skills again while studying statistics and economic game theory. Moving on as a college professor, much of my time was spent trading stocks and commodities. For me, this was a variant of what I had been doing all along in college and graduate school—taking probability, statistics, and risk-taking to a new level. To the outside world—where speculation and academic economics were just a paradox—this must have seemed unusual. Thankfully, it was not so among professional economists. In fact, many of us were in awe of John Maynard Keynes, who was both a legendary economist and a successful speculator in currencies.²

It was the beginning of 1968, and I was increasingly convinced that the rise of computers could revolutionize commodities trading, and provide much better trading tools. Using computers to quickly analyze statistical trends might prove invaluable, as a short response time posed a huge advantage in a volatile market. As a stock trader and a student of computer science, I keenly followed these developments. I also followed the use of computers in stock and commodity exchange operations. While there was limited adoption for clearing and electronic trading, no major institution had a fully electronic trading platform. Computers ...