Today I want to talk about the impact of change on the futures industry and our ability to succeed and thrive through competition, innovation and execution.
In the global derivative marketplace, a march of change has been taking place for the last 30 years. It has been driven by increased sophistication and understanding of the importance of risk management and derivative products, globalization of our markets through the consolidation of global bank and broker-dealer intermediaries, deregulation of over-the-counter and exchange-traded derivatives markets, and rapid and continual advances in order routing, trading, clearing and risk management technologies.
The most fundamental truth about change is that change is not new. Competition is certainly not new. And, our willingness to embrace change through innovation and execution is not new. CME has a long and distinguished track record of doing just that. In 1972, we invented financial futures by introducing foreign currency futures contracts that allowed market users to hedge emerging risks of fluctuating exchange rates brought about by the collapse of the Bretton-Woods Agreement. We followed with the introduction of the novel concept of cash settlement and applied it to an interest rate contract, and soon after, we launched the first successful stock index futures contract. All of these innovations have led to our current position as the market leader in the trading of our benchmark Eurodollar, S&P 500® and NASDAQ-100® stock index futures and options contracts. More than a decade ago, we also became the first derivatives exchange to launch a global electronic trading platform, GLOBEX® that today significantly out-distances its competitors by facilitating trade around the globe for more than 23 hours a day, five days a week.
In each of these examples, we embraced change by innovating new ideas and successfully executing those ideas in ways that created value for our customers and clearing member partners. And, as much as the Chicago Mercantile Exchange has represented the vanguard of change in our industry, so too, the entire derivatives industry has been a leading innovator in the broader global financial services markets. We must all take pride that our markets offer unprecedented opportunities to mitigate risks, reduce costs and improve financial performance using the lowest-cost, most efficient trading instruments in the world. Our success as an industry has led us to grow from 475 million contracts traded in 1990 to approximately 2.2 billion contracts traded in 2002, a compound annual growth rate of 13.5 percent. At the same time, the OTC derivatives market, which evolved from our markets and facilitated the tailoring of risk management instruments for more specialized needs, grew from $3.5 trillion of notional trade in 1990 to $99.8 trillion in 2002.
As I reflected on the history of highly charged competition in this business, I recalled that CME's highly successful Mutual Offset Agreement with SGX was born out of the very same topics that we are now discussing: change, competition, innovation and execution. Our Mutual Offset Agreement represented the world's first linkage between two financial exchanges, enabling traders to establish positions on one exchange and seamlessly offset them on the other. The idea to create a linkage between a Chicago exchange and a new exchange located literally on the other side of the world in Singapore did not happen by chance. It was actually an innovative solution to a competitive challenge from LIFFE in London, which was offering a competitive Eurodollar contract to the one traded at CME. In 1982 and 1983, the first two full years of Eurodollar trading, LIFFE's trading volumes were slightly less than half those at CME. Recognizing the substantial interest from the London trading community in the Eurodollar product, and our own challenges in globally distributing the product beyond the hours of our pit, we created a partnership with the Singapore Exchange. The plan included a mechanism that would allow market participants to transfer their positions to the CME Clearing House seamlessly, taking advantage of the financial, risk management and capital and performance bond efficiencies offered by CME. In 1984, following the implementation of our Mutual Offset Agreement, LIFFE Eurodollar trading volumes declined to less than a quarter of CME trading volumes. By 1995, the CME/SIMEX partnership had succeeded in acquiring 100% market share in Eurodollar futures trading, with LIFFE trading volumes in the product having declined to zero. Importantly, CME Eurodollar trading volumes increased from a mere 324,000 contracts in 1982 to more than 2 hundred million contracts in 2002, making it the world's most liquid and actively traded futures contract last year.
I know many of you are interested in knowing what the future holds for this long-running and highly successful relationship between CME and SGX. I would like to address that directly. Much has changed in this business during the approximately 20 years of our MOS partnership with Singapore. Interest in electronic trading, and CME's evolution as a global electronic exchange, have changed the dynamic and the nature of our partnership with SGX. Nevertheless, it is important to emphasize that we are in discussions with SGX to maintain our Mutual Offset capabilities for customers trading our Eurodollar contract via open outcry. At the same time, we are also enhancing opportunities for electronic Eurodollar trading. We introduced advanced spread functionality on GLOBEX with our Eagle release in January of this year. Since the time of this launch on a quarterly basis, average daily trading volumes in Eurodollars on GLOBEX have increased by approximately 54%.
In September, we also implemented a 65% reduction in GLOBEX Transaction Fees, from 25 cents to 10 cents per side for the vast majority of users of our Eurodollar market, including our clearing member firms and their affiliates' proprietary trading operations, as well as our liquidity providers. We also introduced an important new market maker program for GLOBEX-traded Eurodollar futures during the European and Asian time zones.
These important initiatives are consistent with the change-competition-innovation-execution continuum, as well as with CME's overall strategy of satisfying customer needs. These changes will allow customers who prefer to execute Eurodollars electronically using our technology to do so in an efficient and economical way, while enabling those preferring open outcry to continue to do so via MOS.
In the long run, our customers will determine their preferred venue for trading Eurodollar futures and options contracts. In the meantime, however, we will continue to offer customer choice and expanded functionality - while working to ensure that we offer superior liquidity at the lowest total trading costs on both of our platforms. Another example of the change-competition-innovation-execution cycle resulted in the creation, by CME, of the fastest growing futures products in history. It began with intense competition between the Chicago Board of Trade and the CME in the summer of 1997 when the CBOT outbid the CME for the rights to trade futures and options contracts based upon the Dow Jones Industrial AverageSM. Concerned that the brand name recognition of the Dow - and the potential retail appeal of a Dow futures contract - might begin to erode CME's dominant 95% market share in U.S. stock index futures trading, CME executed the most successful innovation in the futures industry in recent years. We invented a new product extension of our flagship S&P 500 and NASDAQ-100 futures contracts by creating smaller, fungible and electronically traded versions of our larger open outcry traded products. Of course, the rest is history. In their first year of trading, the CME E-mini S&P 500 futures contract traded 886,000 contracts, compared to 755,000 CBOT Dow contracts. In 2002, CME traded 194 million standard and E-mini S&P 500® and NASDAQ-100® contracts, compared to 8.7 million CBOT Dow and Mini Dow contracts. Today, others are attempting to emulate our success, and new mini-sized contracts are being brought to market by a wide range of exchanges around the globe.
Change and competition, and the need to both innovate and execute in order to stay in the game, have also propelled many of the world's most successful exchanges to restructure their operations, demutualizing and transforming into shareholder value organizations better equipped to survive in an intensely competitive marketplace. As a demutualized, publicly traded company, the obvious way to create value for CME shareholders is to heighten our focus on delivering superior value to our customers. CME has been decreasing the cost of trading and clearing CME products while expanding the reach and distribution of our markets. We have also invested heavily in our electronic trading capabilities, and have consequently become one of the largest electronic trading platforms in the world. In July of this year, 49% of all contracts traded at the CME traded on our fully automated GLOBEX electronic trading platform, averaging over 1.3 million contracts per day.
Perhaps the most significant example of our commitment to reducing costs is our recently announced CME/CBOT Common Clearing Link. Under this historic agreement, CME will begin clearing all Chicago Board of Trade contracts at the end of this year. Beginning in 2004, we expect that more than 1 billion contracts of combined liquidity will be cleared at the CME Clearing House each year. This represents approximately 85% of all U.S. futures and options trading. Most importantly, the true strength of the Common Clearing Link is in the real benefits it provides our customers and clearing member partners, who will enjoy significant cost savings because of improved collateral and performance bond efficiencies, common processing, and standardized business practices. In fact, we estimate that the Common Clearing Link is expected to save customers more than $1.2 billion in collateral associated with their trading activity at CME and CBOT. What's more, these reflect real and immediate savings based on volume that already exists - not the promise of future savings based on volume that may exist in the future.
Now, I know many of you are also interested in my views on Eurex's initiative to enter the U.S. futures markets. In recent months, Eurex has launched a public relations campaign to depict itself as bringing competition and efficiency to the futures markets. While I respect the accomplishments and capabilities of Eurex, the idea that competition is novel to U.S. exchanges is fundamentally incorrect. Thus far, Eurex's strategy seems to consist of a flat rate fee structure for all market participants. Indeed, the exchange has been quoted as saying that "Eurex is not in the business of dishing out privileges." An expensive and carefully crafted public relations campaign will not be enough to create a sustainable competitive advantage for Eurex in our markets. I might add also that Eurex's apparent practices of paying for the movement of liquidity, and its opaque rebate practices for selected market participants, are not consistent with the level playing field concept it is espousing. In contrast, CME is committed to total transparency in our business and pricing model with all customers. This model is designed to bring down the cost of trading for all market participants by providing incentives for liquidity providers. We have been extremely successful in delivering the real savings to our customers that are created by liquidity.
One must ask why Eurex will be successful in competing for business in U.S. Treasury bond futures contracts when both Cantor Fitzgerald and BrokerTec failed. In the case of Cantor Fitzgerald, it had every opportunity for success. It held the dominant position in the cash Treasury market, and it brought forth an electronic trading value proposition at a time when the Chicago Board of Trade's Treasury bond futures complex was largely open outcry. It waived all fees: trading and clearing were free. And it failed.
Next came BrokerTec with its tandem strategy of bringing electronic trading to both the cash Treasury and related futures markets. BrokerTec was, of course, a consortium of the largest players in the cash Treasury market and also the largest providers of order flow in financial futures markets. Again, it introduced electronic trading of Treasury bond futures and, yes, it waived fees. And, again, it failed.
Why did they fail? The answer is simple: they never achieved liquidity. They learned that dislodging deep pools of efficient liquidity requires something more valuable than lower trading fees. And they proved what many of us have known for a long time: our customers are concerned with the total cost of trading, not only the exchange fee. How do we measure the total cost of trading? It is a multi-variable function of the bid/ask spread, market impact of moving a large order through the market, brokerage commissions and exchange trading and clearing fees. In most empirical studies done on this topic, it is clear that exchange transaction and clearing fees are miniscule in comparison to market impact costs and the bid/ask spread. The fact is that the U.S. Treasury bond futures market and the CME's flagship Eurodollar and S&P 500 and NASDAQ-100 stock index futures contracts represent highly efficient, low-cost pricing mechanisms in terms of the total cost of liquidity.
The fact is also that it will be extremely difficult, if not impossible, for Eurex to replicate the liquidity and to provide the capital and performance bond efficiencies that will be realized by our customers under the CME/CBOT Common Clearing Link.
It is no coincidence that Chicago remains the world center of futures and options trading. The so-called "Chicago School of Economics" was the first to articulate the importance of free market economies, allowing competition, innovation and execution of successful ideas to be the guardian of a healthy economy. As people who work in and around free market mechanisms, we must be vigilant to adhere to these principles.
At CME, we are fundamentally committed to embracing change and promoting competition. Our focused growth strategy involves expanding our core business by innovating new trading products and new and improved technology solutions. At the same time, we will continue to expand our distribution and marketing capabilities around the globe, and will seek out ways to build on the range of transaction processing services we provide to other exchanges and clearing houses. Our understanding of the change-competition-innovation-execution continuum, and our demonstrated ability to innovate and execute, will help ensure that CME continues our important leadership role in the global derivatives markets for many, many years to come.
Thank you.
