The Chicago Board of Trade, the world`s busiest futures market, paused Friday to hold an anniversary party for its most important contract, but the event was nearly overshadowed by frantic trading in the huge pit where the contract changes hands.
As world financial markets went into a frenzy with the dollar sinking to an all-time low against the German mark, activity in the U.S. Treasury bond pit soared.
Traders said the contract traded an estimated volume of 500,000, which a Board of Trade spokeswoman described as ”very strong.”
Once trading ended, the exchange celebrated with a street party adjacent to its building for the 15th birthday of the launch of the Treasury bond contract, a futures product that has revolutionized modern finance and been copied the world over.
The celebration marked the contract`s launch Aug. 21, 1977, as well as the 10th anniversary of options on the T-bond, introduced in 1982. The fete included a round of speeches, refreshments and entertainment along Financial Place, which skirts the west edge of the exchange.
Among those sharing in the moment was Richard L. Sandor, a managing director of Kidder, Peabody & Co. in New York. It was Sandor, as a young CBOT economist in the early `70s, who dreamed up the notion of trading a futures contract on the U.S. Treasury bond, also known as the long bond. At the time, there were only a handful of financial futures trading in the U.S.
”Looking back, you can say that the contract was brought on at a propitious time in our history,” said Sandor. ”Before its launch, instability was beginning to creep into the market in a major way: The Soviets were buying huge amounts of grain, oil was beginning to increase in price, inflation was on the move and former President Nixon had imposed price controls.”
A 1967 graduate of the Univerity of Minnesota with a doctorate in economics, Sandor noted that after nearly 200 years of American history, the total U.S. debt was about $18 billion, a figure that soon would skyrocket off the charts. The government now owes nearly $4 trillion.
”The U.S. Treasury did $10 billion in debt in one day recently, and the total debt financing has gone from $4 billion less than two decades ago to $50 billion a year,” he added.
The T-bond contract and the options on it are used by money managers to hedge against adverse swings in interest rates and by speculators who bet on the future course of those rates.
With the incredible growth of financial futures in general in recent years, and the explosion in knowledge of how these seemingly arcane instruments function, there is not a pension or investment fund anywhere that could operate without the influence of long bond futures, authorities say.
But there is another important benefit of the CBOT`s famed contract, said exchange Chairman William F. O`Connor.
Prior to its introduction, the bid-and-ask spread in the T-bond cash market was greater than $300. Since the introduction of the futures contract, that difference, known as ”the spread,” sometimes defined as a sales commission, has been reduced to $31.25.
”Until we developed a futures market in U.S. government debt, T-bond pricing was controlled by the 40 or so primary dealers of government securities, with no mechanism in place to foster market efficency,” O`Connor said. ”The advent of T-bond futures broadened the market, providing a tighter market in which to finance the debt.”
It is difficult to exaggerate the success of the contract, not only at the CBOT but elsewhere as well. Every major futures exchange in the world, from Frankfurt, Germany, to London to Tokyo, has developed futures based on its own government`s debt; all have been raging successes.
But none has rivaled the CBOT`s contract. In 1990, its record year, 75.4 million futures and options on the T-bond contract changed hands, a figure that exceeded the total volume of all contracts traded on any other exchange that year, with the exception of the Chicago Mercantile Exchange.
In addition, the success of the long bond has spawned related contracts on markets around the world that also are highly successful.
At the CBOT, for example, 5- and 10-year note contracts were launched in the wake of the long bond, and for the last year they have been trading at or near record levels almost every month.
”I have been studying these markets for 30 years now, and I must say I am bullish on the continued success of this contract,” said Sandor, who is serving a three-year term as a public director of the CBOT.
”The contract has been embraced by central banks the world over. I don`t think the planet has licked inflation, and I don`t believe the world economy has finished growing.”
