The head of the biggest exchange group in the world on Trump, China and handling $1 quadrillion in trading
Terrence "Terry" Duffy is a popular man.
Upon visiting the CME Group office in New York on January 11 to speak with Duffy, executive chairman at the $40 billion exchange group, I had a security guard scope me out. He joked he wasn't going to let me hurt "my Terry."
"Terry is a good man," he said, once I'd shown him my ID a couple more times.
It's not just security guards who take to the 57-year-old executive. Duffy just played golf with George W. and Jeb Bush, winning a negligible sum from the former president. He is close friends with John Boehner, the former Speaker of the House of Representatives. Presidential candidate Hillary Clinton name-checked him on the campaign trail. He has photographs of himself with Michael Phelps, Peyton Manning, and Derek Jeter.
The 57-year-old executive heads a critical player in the global financial system.
The CME Group trades futures and options based on everything from interest rates to real estate, foreign exchange to the weather. It handles 3 billion contracts worth about $1 quadrillion annually, on average. It has been called the most powerful company you've never heard of, and the biggest financial exchange you've never heard of.
With a market capitalization of close to $40 billion, it is more valuable than Intercontinental Exchange, the owner of the New York Stock Exchange ($34 billion), Nasdaq ($11 billion) and local rival Chicago Board Options Exchange ($6 billion). It reports fourth quarter earnings on February 2.
This interview has been edited for clarity and length.
Matt Turner: How's 2017 going so far?
Terrence Duffy: Business is good. It's the start of the year so everyone is just getting ramped up again. It's not like it used to be when I first started in the business, when November was kind of the shut-off date and the start date wasn't until probably like February 1. There was a two-month hiatus for the market place. Now they don't quit because it's so global now. So the markets don't take the breaks that they used to.
People are more focused on what they believe the world will look not only a year from now but days, weeks, and months going forward. It's a different psychology for markets in general.
For us that bodes well because we're in the risk-management business. And we are a very cost-effective way for people to manage their risk. So they are constantly looking at our markets, using our markets on a more frequent basis, versus maybe 10 years ago when you'd put risk on for like six months and feel very comfortable. Today it's different, whether it's the political landscape in the US or geopolitical events around the world. It's a different world in which people have to manage their risk more.
Turner: You said that the current conditions benefit CME. Have your priorities changed?
Duffy: They haven't changed a whole lot compared to the last couple of years. We want to continue to distribute our product around the world. From my standpoint, being in the position I'm in, I'm trying to get our products into different users' hands, expanding our user base. We've been expanding our distribution base, but now we've got to expand our user base. That comes through education and that comes through getting people comfortable with derivatives.
That happens by leaps and bounds every day. People who never traded with us before are using them more and more. They're becoming a more mainstream vehicle for managing risk. Options and futures, mainstream people just understand them more than anyone would have expected five or six years ago.
Duffy: We're focused on that. When I say broadening the base, my focus is the client, all of the clients. We want them to know we are focused on their needs. There's an equation in our world. If we look after our clients, in return our shareholders will get rewarded. And then our employees will get rewarded.
But if you do it in reverse, where you are too focused on the employees or the shareholders, you'll eventually run out of a business model, because the only way that is sustainable is if you increase prices. Eventually, you chase your client away. So my focus on the client.
Turner: So how does that play out exactly?
Duffy: It has played out in a couple ways. Because of regulation and the world we live in now, the cost of capital has gone up. We have to come up with creative ways to benefit the client by creating more capital efficiencies. That's what we are doing. So whether that's taking $21 trillion of interest-rate swaps and compressing them to $15 trillion or $16 trillion, compressing so many different line items, that saves the dealers a tremendous amount of money. There's a lot of capital saved by doing that. And that's a benefit to the client. That's what I want to keep doing.
Turner: That brings me to a question about the dealers. Bank stocks have taken off since Donald Trump won the election. That is, at least in part, because Wall Street is expecting deregulation. What are you expecting?
Duffy: Well, I don't have a crystal ball, and you can only go off what you hear on the administration and what they are saying, and what some of the people they're putting into the administration to advise them are saying. I have to be honest with you. The Senate is not veto-proof. So even though the Republicans control the majority, it is a very slim majority.
We did have a very big problem in 2008, and you can attribute that to whatever you want. Bad behavior was a part of it, and bad lending practices, and everybody was aiding and abetting to that. So we created a new law. It's called Dodd-Frank. And most of the time with new laws the pendulum goes too far. And the problem with this particular law is the pendulum may have swung too far. But only about 60% of the law is actually enacted today.
Everybody thinks Dodd-Frank is in full swing, so people want to dismantle something that's not even 100% enacted today. So I think we have to wait and see how this plays out. But the pendulum definitely swung a little too far against the dealers, in my opinion. The Volker Rule is something that needs to be looked at. They need to be able to proprietary trade. But when they have taxpayers backing up their deposits, and they're proprietary trading, there's some issues there. We are going to have to see what happens.
But I don't see a massive deregulation, like some people might think is coming, only because it is very difficult to do. Laws are difficult to pass either way. The easiest thing to do in Washington is to kill a piece a legislation; the hardest thing in Washington to do is to pass a piece of legislation. So now the legislation is passed you have to change it, and put something else in place or do something with it. And so I think people talk about dismantling Dodd-Frank, the president-elect has talked a lot about that. I think certain things need to happen. But to say it's going to be gutted, I don't think we are going to go back to 2007 again.
Turner: It's interesting that you've said the banks should be allowed to proprietary trade. That seems to be the direction of travel. The Fed released a staff paper on December 22 focused on the Volcker Rule and found that the rule had had a negative effect on corporate-bond liquidity. Why do you think prop trading should be allowed?
Gill: First of all, I never supported Dodd-Frank, even though we now clear interest-rate swaps, things that we did not clear before. Even though people said we were going to make X amount of revenue on it, which I knew was never going to happen, because people were not going to pay that amount of revenue.
Why do I think Volcker will be repealed? I don't know if it should be repealed, but it should modified. Liquidity is critically important, and the fewer people you have providing liquidity, the less efficient the markets become. And a lot of people say that makes it less efficient for Wall Street. It doesn't make it less efficient for Wall Street; it makes it less efficient for people around the world. Liquidity is extremely important whether you're trading in the markets or whatever you're doing in life.
Somehow, some way, those markets are affecting you. Whether you're taking a mortgage out, whatever you're doing in your life, there is an effect on you as far as finance goes. The less liquidity causes wider spreads; wider spreads get passed on to the general public. Taxpayers pay for wider spreads. The fewer participants, the spreads widen.
Gill: It is good. It could be better, but you've got to remember: The liquidity is getting consolidated among a handful of participants, which is never good. I like when it is diversified. I think that is healthier because I don't like it when liquidity goes in one direction. If something happens, we either all pull out or we all go the same way, and we don't have anyone taking the opposite side of the trade.
It's no longer liquidity; it's a rush for the door. So now all we do is create massive volatility. You need people who are natural buyers and natural sellers in situations of crisis. I actually think there can be room for that. That doesn't mean the market isn't going to go where it's going to go, but at the same time you need people on both sides of the market.
Turner: It's kind of like a shock absorber.
Gill: Yes, because otherwise you've got the same participants all going the same way the same exact time. Whether it's high-frequency traders, prop traders, or anybody else, it doesn't really matter who they are, but we need to have more diverse trading in all market places.
Turner: There's this argument that liquidity looks fine until suddenly it's not. And that's sort of what you're describing. So you could say that out of all the trading days in a year, 99% of the time, liquidity looks just fine. But when it's not, that's when suddenly the markets move in a dramatic fashion.
Gill: And everybody asks what happened. Well, we all moved the same way, that's what happened.
Turner: So you think proprietary trading could help?
Gill: I don't mean that it's going to eliminate quick moves in the market, because we live in a technology-driven world in which the markets move faster than they ever have before. The information flow, everybody has it, so we all see it and we can all go with it. And nobody is going to walk in front of a speeding freight train. That doesn't make any sense. My point is that the markets could be deeper and more liquid and have more diverse participants. That's all. That doesn't mean markets won't move in one direction quickly.
Gill: HFT firms are no different to liquidity providers that used to stand on trading floors in New York and Chicago and other places. It's just technology and it's faster and it's automated. It's more efficient, and as long as it's properly monitored and regulated, there is nothing wrong with it. I am a supporter of it. And I think people who have opposed it have opposed it for reasons that are not fundamentally sound.
You need to understand where we're at in the world. You can't oppose a plane that can go faster than one 30 years ago, because now it flies faster. Why would you oppose it? You don't. You have to have a fundamental reason why. I think the opposition has to do with a misunderstanding that HFTs were getting an unfair advantage in the marketplace. Well, if they were, it wasn't because HFTs were doing something - in my opinion - wrong.
There are loopholes in the system that allowed them to do so. And if you look at Reg NMS, that came into play in 2007. HFT wasn't even around in 2007. Who knew what Reg NMS could do when computers could start to see these heat-seeking missiles going from the NYSE to Nasdaq to backrooms? I mean, who has the best bid and offer? It's got to be in nanoseconds.
Computers are chasing it, and the high-frequency guys had an advantage. It wasn't that they saw the orders - it's because of the regulations. I'm not saying the guys did anything wrong, because this is the way the markets were set up.
Duffy: There have to be changes, because the world has changed since the rule was put into place. I hate to keep using these analogies, but you can't use horse-and-buggy rules with Ferraris on the road. You need to change them.
That's where we are at today. I think it needs to be revisited. Maybe Reg NMS needs to be called something else and modified and changed a little bit. Yes, there should be some changes so that regulations are up to date with the markets.
Turner: How do you plan for the future when there is this uncertainty about what the regulations will look like?
Duffy: As far as regulations go, I am not anticipating any changes in the near term. I think it is too early to determine what is going to happen. What I think people are not talking about are new regulations. That, I think, will not happen. Everything that is in the financial-services industry is what it is right now.
One of the things that people got excited about, especially the markets after the president-elect got elected, was that it wasn't so much a case of dismantling existing laws as no new ones were coming. That's sometimes just as important, if not more important, than dismantling the ones on the books. I think that's what gave the market the comfort to do what it did. Anybody in this town who knows about regulations knows laws are hard to change.
What always scares them is the unknown of what could be coming next. I think what gave us clarity in the financial-services industry was that we wouldn't be getting more crazy rules. Also, a lot of Dodd-Frank that has yet to be enacted probably won't be now, so that's deregulation without doing anything.
Turner: You might have less uncertainty about regulation, but wouldn't you say Trump introduces some uncertainty in other areas with his governing style?
Duffy: That, and people also believe the tax code is going to change for corporations dramatically, too. When you have the highest tax code in the industrialized world, that's probably going to come under some serious consideration from people on both sides of the aisle.
With the Republicans controlling both the House and the Senate, and the administration, he could probably get something like that passed.
Turner: Right, and that's very meaningful.
Duffy: It's very big.
Turner: Let's talk about repatriation. There are a lot of companies with a lot of money overseas. How do you expect that to play out?
Duffy: I have been an advocate for a repatriation bill for the last five to 1o years. I just think it needs to be done. Now I understand how some political folks might think that it's opening Pandora's box and we will just be condoning bad behavior.
Everybody who circumvented our laws to go hide money, to not to pay the government, we are going to reward them by saying you can come back at a rate that's reasonable. That's been the argument. I get it. But at the same time, when we have a crumbling nation, I think that you have to make decisions and get off of your high horse and say, "You know what, it is what it is sometimes."
We've got $20 trillion in debt already, we've got anywhere from $1 trillion to $1.5 trillion that could come back here if we bring it back at a rate that's reasonable. If we take X amount and put it into an infrastructure bill that goes anywhere from $600 billion to $1.5 trillion, we could probably do a pretty good job at rebuilding parts of America without adding to the national debt. I think that is important, and politicians need to come to grips with that.
You know what I relate it to? I don't want to be sophomoric about this. When they legalized marijuana and it's still so controversial, it could still be harmful or could lead to people using other drugs, but a bunch of states still legalized it, why is that so different from this? You know what I mean? I don't want to draw a bad analogy, but I think there's a point where people need to say, "It's there. They're doing it anyway."
The paperwork costs us more to arrest these people than the harm of the drug, so just allow this to happen and be done with it. And if you lower the tax rate, we don't have to worry about it going overseas any more. It is a two-step process that needs to be done.
Turner: The potential benefit isn't only the tax revenue, which you talked about, but also what that money can do once it's back in America. The hope is that it is invested in capital expenditure, though historically it has been used for M&A, buybacks, or dividends. If that money was brought back, how do you think it would be used?
Duffy: That money overseas? You would have to look at what companies are over there and what their capital-return policies are. Honestly, I don't really know. We have very little over there, and what we do have over there we are using for our European operation.
But what I also think is important is that this current president-elect could probably take on another trillion dollars on to the deficit, get it passed, without a repatriation, for an infrastructure bill.
Duffy: First of all, for an infrastructure bill, every Democrat would be out of their mind if they didn't vote for it. It is mostly unions doing the road, so this is all their people's jobs, if you want to call them that.
Second, the people who normally oppose it would be the Tea Party guys, and if you look at how the president-elect won this election, guess who elected him? If he flew into someone's district that voted against his proposals, I wouldn't want to be that Tea Party guy. The Tea Party has some issues now. The president is who they elected. Trump carries a lot of weight in these guys' districts, so they're going to have to support him.
Turner: I've been in the US for just over two years now, so I didn't live here when Obama tried to put something similar into effect. What happened there? Infrastructure spending at that time would likely have been more powerful.
Duffy: Yeah, the 2011 grand bargain with Speaker Boehner, he walked away from it. John's one of my dearest friends, I know him very well.
Turner: So you might be able to provide some insights into how that played out.
Duffy: Well, the president promised X, the speaker was going to deliver Y, and the president backed away. He came back with a different number, and that's not what they agreed to, leaving the speaker hanging there. I'm sure the president has a different story, but that's not the right one.
Turner: Stepping back, you mentioned you have money in Europe, and you've talked about taking the products global. How is that going?
Duffy: We've already taken our products global. We'll walk through an extreme evening. The night that president-elect Trump was elected, we did 18 million contracts that night out of Asia. Now our average daily volume for 2016 was just under 16 million contracts. In just a couple hours, we did 18 million out of Asia. For the day, we did 43 million once US markets were up and running. We've already got a great distribution throughout the world.
Our plans for that are solid and we're doing quite well. My focus has been to look more at Hong Kong - not to acquire something in Hong Kong, but to have more salesforce people there to help get more business there, make it more streamlined, and get the business from mainland China that comes through Hong Kong.
Turner: How is that market opening up?
Duffy: It's not. It's still closed.
Turner: But do you -
Duffy: I'm not a Chinese expert, I'll tell you that right now. It's difficult over there. They move slower. We're an impatient bunch here in the US. The Europeans are probably the second-most impatient, and [the British] are calm, and then you have the Asian community where 50 years is like tomorrow. It's like a different world. People say the markets are going open up. Yeah, they probably will someday.
I don't know when that's going to be. But when you look at what they're trying to effectuate, it looks like they're trying to bring the markets to them rather than bring their markets to the rest of the world. That's what it looks like to me right now.
Turner: I was in London when the Hong Kong Exchange acquired the London Metal Exchange, which is in keeping with what you're describing.
Duffy: Bad deal.
Turner: So how does that influence your thinking about China? If that market opens up there's a huge opportunity, but you may be waiting forever.
You have to continue to be there, continue to work, but at the same time you have to be very mindful of the cost when you decide to invest in a place that's supposedly going to open up their markets, but you don't know when. So I'm very cautious.
Turner: I do think a lot of firms have invested in China in the hope that the markets would open up. They've spent a lot of money on talent and that never paid out.
Duffy: I want to know: Who has gotten paid from China? Who has made money as a European or US entity in China? The one that was going to make money was Citibank, and then 2008 happened. My point is, I don't know anyone who has gotten paid.
Turner: But you have to be there.
Duffy: But you have to have some sort of investment there. There's no question about it. They're not just some backwards country. They are a player in the global economy. They are going to be bigger and bigger as time goes on. I think that, eventually, as they continue to be a part of the global economy, their markets will be forced open whether they like it or not.
Turner: What's next? How are the markets going to evolve from here?
Duffy: I don't see it changing anytime soon, only because there are so many structures out there that still look like they did in 1995, in 2005, outside of technology. The fundamental factors in the marketplace, whether it's mortgages, whether it's metals or agricultural products, not much has changed. It's hard to say that markets are going to evolve in a different manner in the next two to three years. I just don't see that happening.
People need to eat. People say agriculture is boring. Yeah, OK, it's boring until you're hungry. Then all of a sudden, finance gets involved. So the question is, are the markets going to get involved? Who is going to invest in what to figure out how we can get more out of what we yield from an acre of land? There could be a lot of investment there.
And then you can look at the energy markets - they're interesting. What's going to happen there? The president-elect is supposedly supporting more coal in West Virginia, but at the same time gas is so plentiful, natural gas. Do we look to evolve more into that world?
The asset classes we have today that run the world, I don't see them changing that dramatically, to be honest with you. We have evolved a lot over the last several years, but most of the evolutionary changes have happened with technology, not so much with the fundamental products themselves.
Turner: How do you keep up with how fast things are changing?
Duffy: You do it by investing in businesses that have a vision for innovation for the future, and then you have to decide, internally or in your own mind, what's really going to make sense? There are some far-fetched ideas from 10 years ago that are mainstream today, and there are some far-fetched ideas 10 years ago that are still far-fetched. You kind of have to draw that conclusion about where things are going to go. That's not easy.
There are going to be a lot of people in business, not just people running exchanges, but people in business generally who are going to have to make some pretty tough decisions. The bets that they put down could be dramatic, because of how the world is going to change.
Let's take climate control, global warming, for example. It's something that affects us all, and it's real, and I don't think people can debate it. But the problem is, if we did everything right here in the US, and in Europe, you wouldn't change a damn thing unless China and India do the right thing, too. We've got to get together more as a global group of people, to say "Let's do the right thing." I think that applies to markets and everyday life.
What does that world need? That's how innovation works. We've come to a place with technology where it has stymied innovation to a point, because we don't think about what should happen. We rely on technology to tell us what should happen. Does that make sense?
Turner: It does, and it goes back to what you said about thinking about the client and what they need. If you put that at the heart of everything, hopefully good things happen. You sometimes see technology that is a solution looking for a problem. Go figure out what the problem is first.
Duffy: Yes, it is, and I think you need to know the client and understand the client. And if the client wants XYZ, then you'd better know the price of XYZ before you walk in and talk to the client about whatever the hell you were trying to sell them. He may not be in a good mood right now. You don't know, so you need to understand the client. That's something I think we've gotten a little bit away from.
You know, the president said this last night in Chicago. I've been saying this for a long time. He made a comment that, for people who want to communicate by Facebook and social media, and they're tired of being bullied, why don't they just talk to each other? I found that the most profound thing I've heard him say in eight years. To be honest with you, I think we've really gotten away from that. The same can be said of innovation.
We've gotten away from innovation by having technology get in the way of you and I talking about what is a good idea. That's what I'm trying to get my team focused on at the exchange.
Turner: What has the response been?
Gill: Well, I just had a meeting yesterday with them and we were sitting around talking. We have an innovation lab like everybody else, so I questioned it. "Well, what the hell is this? What, are we Google now? What's going on here?" And I said, "You know, I don't mind it, but at the same time, let's focus on our brains innovating, and not, you know, technology trying to tell us."
Turner: Right. There was innovation before innovation labs. It seems to me that they create an artificial environment.
Duffy: It seems like, excuse the pun, derivatives of derivatives created innovations off of technology in all different sectors, not in my world of derivatives, but you know what I'm saying. Whatever it is that is being innovated is something that was also created because a computer said this might work if you make this better. What we've done is make old ideas better, not new ideas new.
Turner: You talked about getting to know your clients. So much trading now is done electronically, communication is a lot more electronic. Is it harder to get to know your client now?
Duffy: No, I think what's important is that you have to remember that if a client is trading his own money, it's his own money. If a hedge fund or a mutual fund or sell side or big buy-side participant is trading what they call institutional money, you have to remember you have to go back, and say, "OK, where did this money come from?" Even though it's institutional money, it came from somebody.
So we took your hundred dollars, my hundred dollars, and his hundred dollars, and next thing you know someone is trading $1o billion dollars, and they call it institutional money. The problem is that you have to remind yourself that that client is trading someone else's individual money. You have to approach it in that vein, so I still think there's a personal touch, even though it's institutional.
Turner: So you find it helpful to connect it to the human aspect? Because that's someone's retirement money.
Duffy: Well, that's the world I came from. Even though I understand technology, I've had the good fortune of trading my own money for 23 years, and then going into management in 2002, and now being CEO and chairman. I've kind of seen the whole spectrum in my 36-year-long career, and it's quite fascinating, because I still understand how crops work, and I still understand how automobiles get made and who leases and who buys, and what supply and demand is, and yet I understand the technology and the world we live in today. You've got to keep a balance between book smarts and practicality.
Duffy: Yes, very much so. I don't really do a lot of interviewing of people, because they're pretty much vetted before they come up to me. But when I do, I like to listen. They're waiting for me to talk, but I just listen. "OK, bud, what have you got to say? Let me hear you."
And I can tell when they've just read something about me and they're trying to repeat it, and it isn't going to work. Tell me about your life experiences. Tell me why this is good for you. But it's harder and harder to find it, because the life experiences are totally different today.
The life experiences are this [mimics a computer controller], technology, video games, and all this other stuff that's a bit out of touch with reality. Not all of them, but there's a good chunk. They're very smart people. But you've got to be able to communicate. You've got to be able to walk out and meet the next person with a completely different personality and be able to move forward. That's how you become successful in all walks of life.
Turner: So you think some of the interpersonal skills have been lost because people are spending so much time communicating on Facebook and social media?
Duffy: OK. You write an article, someone comments on it. You think, "Jeez, I wouldn't want to meet that guy." You picture him, 6-2, 240 pounds, muscles out here, and then you see them in person and you're like, "Are you shitting me? You wrote that comment?" Sometime it's just a little amazing how that all comes about.
Turner: We used to have a comment section on our site that has been temporarily disabled. I personally am not sorry about that.
Duffy: That is going to happen more and more.
Turner: You talked about America and its crumbling infrastructure. The state of the country, whether it is crime, or state finances, or infrastructure, all of that is conflated into this idea that America has been deteriorating. A lot has been written about crime in Chicago, for example.
No matter where you're at, there are pockets of bad behavior. There are pockets of bad behavior in business. There are pockets of bad behavior in society.
It's up to all of us to try to fix it and root out some of those problems in business and society. I feel we have a moral obligation to do both.
Turner: Can big business do more? I'm interested in what has happened in Detroit, for example.
Duffy: Detroit is a great example. Jamie Dimon, with Bank One, has put a big investment in to Detroit. I have friends in Detroit, and I looked at it personally to do some stuff there. I'm not saying Detroit is going to come back or not, but you have to look at geographic locations in the United States, and say, "OK, what makes sense?" Detroit could. Kansas City could. Chicago does.
Chicago, and Illinois, should have no business being a state that is at the bottom of the totem pole, and being on the nightly news on every station around the country about how bad it is. It's got the rail, the waterway, and the airports, and the best location in the US for distribution.
It has a very diverse business community, between our world, the insurance world, the advertising world. It's not a one-trick pony. It's not a financial-services town. It's not an IT town. It's kind of a little bit of everything. It has got a really good advantage, but when you look at people doing what they are doing in Detroit, Chicago should take notice.
Business has a moral obligation to be a part of it. You can't be the entire solution, because the entire solution needs to have everybody. Our foundation contributes to so many different Chicago public schools. That's great, but we can't change it alone. Everybody has got to do a little part. If you've got little more, do a little more. If you've got a little bit less, do less.
But if you're going to do nothing and bitch about it, then nothing is going to happen. I'm a firm believer in that, if you've got a little, give a little, if you've got a lot, give a lot. That's the way we look at it. We're very much involved in the civic community of Chicago and Illinois and New York, because part of our business is here.
I'm 58 years old and I have 13-year-old twins and I'll be married 25 years next week. This is a weird equation. Can you do this math? We had children late in life, they're our only two children, and I want them to have a brighter future.
They're going to grow up in a much more diverse world, and if guys like myself aren't going to lead, in the position that I am in, to show them it's OK to live in a diverse world and for us to help everybody, then who is going to do it? Because that's where they're going to be.
I'm very passionate about this. Whether it's Kansas City, Detroit, Chicago, Cleveland, we all need to do our part to make it a little bit better. Will they all be what they were at one point in time? Probably not. But could they be a little bit better than they are now? I think so.