Top executives talk about today's volatile markets, what's driving business and where the markets are going next.

CME Group hosted its Industry Forum in January with four high-profile executives from the securities and derivatives markets to discuss how these firms use markets today and where exchanges and customers are going in the coming months and years. The panel was comprised of Craig Donohue, CEO of CME Group, Robert Greifeld, president and CEO of the NASDAQ Stock Market, Kevin Davis, CEO of MF Global and Matt Andresen, co-head of Citadel Derivatives Group. The roundtable was hosted by Rick Santelli, correspondent with CNBC Business News. The following is an edited transcript of the conversation.

Rick Santelli
We've had a lot of macro economic trends over the last six to seven months. Many of them emanated from the credit markets. How are they impacting your respective businesses and how do you think the sub-prime issues of 2008 will end?

Robert Greifeld
We clearly have an economy that's going through some manner of transition. I'm not here to forecast where it might end up, but any time there is a transitional viewpoint, you introduce volatility into the marketplace and that drives volume. So clearly, for NASDAQ as a business, the volume has been outstanding and quite positive for our business model. But we realize that the downside is not so positive. So our business model would stand the transition, assuming that we come out of that transition in what I call a shallow recessionary time and/or no recession, where we go back to a growth mode. To the extent that we get into a prolonged recession, then clearly we'll see an impact on our business model.

"The current circumstances really highlight the value of a centralized, transparent, liquid exchange."
-Craig Donohue

Craig Donohue
Just to add to that, CME Group is in a fortunate position in that we don't have a lot of direct exposure to the specific credit product problems we've seen in the market. Nevertheless, those issues obviously have caused a lot of collateral impact to other asset classes and markets. And as Bob mentioned, volatility has certainly driven demand for our products in the fixed-income and interest rate and foreign exchange and equity areas, among others.

The current circumstances really highlight the value of a centralized, transparent, liquid exchange that has a central counterparty clearing mechanism people are looking for, instantaneous liquidity with established prices, established valuation. They're familiar with the fact that we have a zero debt system, a twice daily, at least, collect cycle. And so that ability to reduce bilateral credit exposures in a market where bilateral credit risks are much more significant than they were a year ago, or to overcome more strenuous credit limits between bilateral counterparties through a central counterparty clearing mechanism, has been actually very valuable.

RS
Kevin, you're pretty much in the brokerage business.Now, after this topic, one would have to ask whether it's hedging activity potentially bringing buyers in treasuries low yields, or speculators moving the price of oil up. Do you think both of those camps, or either, dramatically affect prices?

"Shorts on prices are unquestionably impacted by speculators. But when prices settle, when markets go to delivery, the fundamental laws of supply and demand prevail."
-Kevin Davis

Kevin Davis
Obviously, shorts on prices are unquestionably impacted by speculators. But when prices settle, when markets go to delivery, the fundamental laws of supply and demand prevail. And so with enormous growing demand for energy all over Asia Pacific, despite perhaps a small downturn in energy demand from the United States and possibly Europe, you will see demand continue to grow and, speculators or no speculators, energy prices are set to keep going up.

I actually wanted to just add to the prior question.When I was a runner here (in Chicago) back in 1982, the first lesson that I was taught by the guy I was checking trades for - I think it was Pat Arbor - was, "Listen, kid, bad news is good news for futures." Well, actually he was wrong. Any news is good news for futures.

So, clearly, the tumultuous events we've seen have been enormous drivers of volume. And every other day there's another expectation of what's going to happen. And all of this is good for us and good for driving volumes.

Craig's point that people like central clearing counterparties in times of credit crisis is absolutely correct. And our industry has demonstrated through a whole series of crises, when the market's really going to melt down, the one place you can always get a price is in our industry. And we have fortunately been very good and careful about the way we collectively manage the risk in the industry. So, all positive.

RS
In many ways, we're talking about regulated versus over the counter (OTC).Do you think all this volatility is going to be a shining star to bring more business into the regulated exchanges? Is there room for both to co-exist? Meaning, will there be more clearing operations opened up from the OTC market from the traditional exchanges?

Matt Andresen
To Craig's point earlier, the tremendous advantages afforded to speculators and hedgers in the marketplace by having an electronically quoted and traded, centrally cleared platform are immense. And when you can free up working capital in a tight credit environment by having everything cleared in one place, whether it be in DTC (Depository Trust Company) when you're trading on NASDAQ or at CME when you're trading E-minis, those are profound advantages for everyone in the marketplace.

At Citadel, we've always believed that it's best for our business and investors to have things moved out of the OTC markets and into the centrally cleared, electronically traded platforms of the exchanges. And we've always traded much more on platforms that were open and transparent. I would imagine that coming out of a period like this, if funding costs go up and risk profiles and people start charging more for taking risk to loan, those advantages become even more profound.

RS
Craig, are there any products that might marry the two issues together - OTC-type products that the regulated markets are going to get into?

CD
We're working on that on a number of different fronts, as many people know. We have an effort under way with spot foreign exchange trading and, ultimately, forward and swap foreign exchange trading that brings certain elements of an exchange environment in terms of market execution and central counterparty clearing services.And we're looking at doing the same thing in the more standardized segment of the interest rate swap market.We're in the very early stages of thinking about what our opportunities might be in OTC agricultural commodity products, agricultural swaps for example.

So, we're trying to pick those areas within the OTC market where we think we have something that is valuable to the client - whether that's a more transparent, central limit order book or clearing and capital efficiencies.

RS
Internationally, the Chicago exchanges are very big on BRIC - Brazil, Russia, India and China. How are those countries going to figure into business strategies? And, if you don't do business in China, is that a major disadvantage?

KD
We have a fantastic business in India,where we have 400 colleagues, 150 of whom have MBAs. It's growing fast and dynamically all the time. It's focused around commodity futures and equity derivatives as well.And now that the country is allowing the residents to invest overseas, we're seeing more business coming out of India. And we're very excited to be part of India and invest heavily in our Indian business.

In China, it's been somewhat problematic for us. On one hand we are among the largest providers of hedging services to those Chinese corporations that are allowed to transact business overseas. And we do business principally in metals, but also in energy.

The area of China that we're not involved with, and there are lots of firms who are, is retail domestic financial services for the Chinese. I think in some markets there is first mover advantage and in some, a first mover disadvantage. And from our perspective, when it comes to things like retail financial services, we're quite happy to let others be the pathfinder and see how that market develops. Because frankly, the prospect of buying a 49 percent share in a loss-making business is not something that would be inherently attractive to us. And pretty much that's all that is being offered.

CD
We have a couple of exciting things both in Brazil and China. We have just completed a definitive agreement to acquire a 10 percent stake of the Brazilian exchange, one of the fastest growing and fourth largest futures exchange in the world. As part of that, we'll be looking at ways we can also partner with them by combining our global distribution networks and then looking at opportunities for us to work together in clearing and risk management and perhaps even product development and market development in Latin America. So we're very excited about that.

Separately, as many people know, we're working with the China Foreign Exchange Trading System to help facilitate Chinese bank access to our interest rate and currency markets to give them the ability to trade in a well regulated, liquid environment, which doesn't yet really exist in China.

"Our operations internationally have been primarily focused outside the mainline transaction business... We have been incredibly successful in China."
-Robert Greifeld

RG
Our operations internationally have been primarily focused outside the mainline transaction business. So, with respect to our listing operation, we have been incredibly successful in China. Over the last four years we've attracted almost 80 companies from China to list in the domestic U.S.market. So at the end of last year, China passed Israel as our largest non- U.S. listing venue.

With respect to India, we have not been as successful with main market listings, but have been very successful with what's known as 144As. And that is private placements eligible to be sold to qualified institutional buyers. So we feel very good about that.

And there is our pending transaction with OMX, the leading provider of technology to the exchange world. They have over 65 exchanges that use their fundamental technology. And we're pleased to sign up the Bombay Stock Exchange on a $40 million contract for all their technology - trading, clearance and settlement. So our operations overseas from a transaction point of view have been quite limited, but we see great opportunities continuing on both the listing side and technology provision side.

RS
Now, if we look at the landscape overall, speed has really changed in terms of execution. Is speed still a very important aspect of electronic trading and is the global demand going to push speeds even faster in the future?

RG
Well, I'll start by saying we're proud that with our I-Net platform, we have response times to incoming orders under one millisecond. Speed by itself doesn't provide value, but access to a market in a deterministic fashion is what matters. So the lower the latency time between the decision to buy or sell, and when you know whether you've got the execution or not, is a true value. With the tremendous volume recently witnessed, you saw a flight to quality in that our response time to incoming orders is quite consistent. So in that environment, our market share actually increases because people know that they will have a deterministic outcome to the incoming orders. And that's the fundamental value.

"People talk about the threat of speed to the markets. Actually, it's quite the opposite."
-Matt Andresen

MA
As a liquidity provider at Citadel, imagine if you were going to place a quote to buy something and you had to write it on a postcard and mail it. You'd know you have a huge amount of time-risk associated with that quote. As that risk gets lower and certainty of being able to make a change to that quote gets tighter, you're able to be more aggressive. Sometimes people talk about the threat of speed to the markets. Actually, it's quite the opposite if you can cancel something very quickly or enter a new order very quickly.

But just as importantly, if you can do that consistently, even when the Fed cuts rates by 75 basis points in the morning and the markets are melting down, and if you have absolute certainty that you can get your order in there, you can still bid aggressively. Those are the times when you want to bid most aggressively. But if you're hung back by a slow connection or fear from the last three times this particular system melted down, you will not be as aggressive. So the benefit to us of having NASDAQ and having CME available not just quickly, but consistently, is really the underpinning of our whole franchise.

CD
We've been doing a good job of enhancing response times just with our implementation of the e-cbot products under the Globex platform. We've seen at least a 50 percent reduction in average response times across all of our futures contracts. But I definitely agree with Matt. It's a portfolio approach. We try to focus on speed, capacity, reliability, breadth of functionality and being able to offer high speed in a very consistent way during times of real market stress and not just in ordinary trading markets.

RS
We would now like to open this up to the floor.

CME Group celebrates the launch of CBOT's electronic products onto the CME Globex platform on January 28, 2008, with a NASDAQ closing bell celebration. Shown are executives from CME Group, NASDAQ, and Citadel.

Audience Question
You talked about the expansion of your business in India and other places, but do you see continued growth or potential continued growth here in the U.S. and Europe?

KD
Most definitely. Our business here in the United States is growing very satisfactorily, as is the case in Europe. One of the big differences between what's happening in Europe and what's happening here in the States is that product innovation is easier because of the regulatory differences.With new products you can actually roll them out that much quicker in Europe. That's not a criticism of the United States, it's just different.

As a matter of fact, one of the most popular trades that we see from customers today are five-minute trades - where is the FTSE going to be in five minutes' time? Where is gold going to close in 35 minutes? And each of these trades can be constructed in a way exactly tailored to fit the interest of the customer. So that's a growth phenomenon we're seeing in Europe, and indeed in Asia as well, that we're not seeing here in the United States. Although, I'm aware that there are some exchanges who are looking at ways in which they can replicate some of those products.

I guess the biggest driver for our growth in the United States and Europe this year has been the credit crisis, not just because people trade more when the markets are flying around a lot, but because people want central clearing counterparties. Most of what's been going on in the last few months will reinforce the reputation of our industry, continue to attract more business to the industry and will be positive. So while I expect the rate of growth for our business in Asia Pacific to be faster than it is in the United States or Europe, it is because it's from a much lower base.

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