When the Chicago Mercantile Exchange (CME) launched online trading of its interest rates product line in 1999, the medium was slow to catch on. By January 2004, just 10% of this business was traded electronically. Yet last year the business -- futures and options on futures for interest rates on Eurodollars, or U.S. dollars held overseas -- suddenly took off.
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.
What kind of expertise are you looking for in the people you hire?
Krause: In our Globex Control Center [the electronic trading control center and help desk], we started off thinking that we needed PC guys to help because this is a PC system. But just about overnight we learned that we needed traders in there who understood the lingo. We hired a lot of people into the technology area who have worked for trading firms. They might be a really technical guy, but again they have worked with traders developing a trading system at a local firm. Yes, we do have the ponytail guys who sit in front of computers and don't talk to anybody, but you can't hire all people like that. It takes a combination.
Redding: On each one of the major product lines I have someone that is fairly technologically savvy. While Jim hires businesspeople to help him out, I actually hire people with a little bit of technology background because the worlds are melding so quickly.
As that melding takes place, are there any turf battles?
Krause: The issues that you run into are usually ones of prioritization. The resources you have are finite. I'd love to spend all this money, but I can't. We have a management team to make these decisions. It's more than just Rick and I deciding on these priorities.
Redding: My guys can work with finance guys to lay out a business case for why this project needs to get done. I can make a compelling story to do one thing versus another, but Jim also has to serve clearing [of trades] and operations. It's not just Jim and I in a room saying, "This is what I need because it's really cool." It has to be put in context of the overall exchange.
How do you ensure that on a project like this, business and IT are actually aligned?
Krause: We have several touch points where teams work together and say, "OK, this was the original design chart, and this is the fork in the road here; are we really building it to the specs you want?" There has to be transparency in projects, and there has to be a continual feedback loop.
Redding: There are definitional things between IT and businesspeople. It is always a constant struggle and always a constant reinforcement of what we have to do and to make sure that we are saying the same things. The dialogue, in my opinion, is the most important thing.
How much time do you spend talking with each other?
Krause: We talk a few times a week.
Redding: We can get to the point very quickly. Jim may ask me to prioritize a project for him or give him a time frame. If you know one another, you know how to communicate, and if you are not spending all of your time defining the issue you can actually be pretty efficient in making decisions.
The biggest problem you usually have between business and IT people is defining the issue. That is why it's good that Jim's been here 20 years and I've been here as long as I have because you don't spend time defining the issue. But a half an hour with each other may mean the people on Jim's team and my team will work with each other for hours or days to get the specs right.
Did you uncover any problems in how you work together?
Krause: I think the thing since I've taken over is just getting my people to be less siloed, to have more of those conversations. It all comes back to communications. A lot of tech guys read three words and say, "I've got the solution; it's done." Well, no. I mean, let's vet that a little bit. I want my people to get these other questions answered, and if they have, then we're good to go.
Redding: You need to spend more time up front making sure that one person on IT and one on the business side actually agree on a project rather than saying, "I got it, I got it, I got it," and then they build it and it is not what you think because everyone kept nodding their head. If you spend more time up front making sure everyone understands exactly what we are trying to accomplish, that flows through the whole project.
How successful has the Eurodollar been?
Redding: It has been a business success. Taking Eurodollars electronic did two things for us, but the driver for both is geography. Not everyone can stand in the trading pit -- there's only so much room and so many hours of the day. Putting more Eurodollars on the screen meant we could reach across the Atlantic to untapped customers throughout Europe, and it also helped us reach out to new customers at hedge funds, trading arcades and proprietary trading firms. All of this new volume creates more liquidity and more opportunities for everyone.
Was the system flexible enough to adapt?
Krause: You have to balance time to market with ultimate flexibility. Maybe you want ultimate flexibility. It takes a lot longer to do that. It's more expensive. Your Cadillac has a lot more buttons that your Yugo, and it costs a few bucks more.
Time to market is also a critical issue. Yes, you try to build in flexibility. Again you can only build in the flexibility that you anticipate. And there is tremendous variability.
Did that cause problems?
Krause: We're constantly tuning the system. We are in here every weekend making enhancements, trying to keep it performing well. The point is trading patterns change frequently, the markets change frequently. I think it is just our role, our responsibility to do what is required to run our market.
What have you learned from this whole process?
Krause: You have to have some understanding of the business. You also have to have some understanding of the technology. We'll collaborate. We'll talk. If I have an issue, I'll send Rick an email or get on the phone. If he has something that didn't work right, we'll try to react to it. Even if he doesn't like the answer, knowing the answer is a lot better than just letting things happen. You can control the reaction if you know it is going in the wrong direction, and that is important.
Redding: It's important for my team and Jim's team to see that we're communicating, that we're always on the same page. I want to encourage the guys on my team to talk to those people they need to talk to on the project in IT. If we are aligned and we're communicating, it only reinforces what they need to do.
Jim Rendon is a freelance writer based in New York. To comment on this story, email firstname.lastname@example.org.