Richard Sandor: Inventing markets out of thick air

Futures, Fall 2007 by Collins, Daniel P

At the heart of his success seems to be an innate understanding of the purpose of futures. He has looked outside the industry to find sectors and industries that face risk and need a mechanism to price and transfer that risk.

"It is like Gordie Howe said, 'You have to skate where the puck is going not where it has been.' You not only have to understand where current risks are but you have to anticipate where futures risks are going to be," Sandor says. And by studying history he knew in the late 1960s that although interest rates had been basically stable since the end of World War II, that had not always been the case and would not likely be the case in the future. "There was no other industrial capacity. We controlled 50% of the industrial capacity and two thirds of the world GDP and of course there was no volatility in capital markets."

He also understood that there was insufficient capital in the insurance markets in the 1970s. "And if you believed that there would be continued migration to coastal areas over the next 20 to 30 years [you would know] that a hurricane that struck an undeveloped part of Mississippi would wreak no damage [then] but 30 years later could cause billions [of dollars] of damage.

Sandor says it is necessary not only to understand markets but to see their evolution. That is why he wrote a paper about electronic trading in the 1960s and was ahead of the curve on other trends. "There was a lot of hurricane and earthquake exposure [back then] but the population in California was 16 million not 35 to 40 million [and] Florida was tiny to what it is today. ...So you have to say 'what are the mega trends here?' and then [reply] 'now the mega trends are air and water.'"

Sandor says his foresight was not so much an understanding of futures markets but, "extrapolating what the world might look like 15 or 20 years later. If you really want to get on the cutting edge you have to take some risk about looking ahead 15 to 20 years and making a bet that you are right. Whether it is insurance, electronic trading, interest rates or air."

INVENTOR

The true nature of an inventor, a term Sandor prefers, whether you call him an innovator or agent of change, is that he is always working on the next invention, and while Sander's previous innovations were just taking hold, he was looking to the future. The future, however, was a little foggy, what with acid rain, smog and this odd scientific notion of global warming.

Sandor wrote a paper in 1989 promoting the use of markets to tackle the issue of acid rain, and that research played a part in the passage of the Clean Air Act of 1990, which mandated the reduction in sulfur dioxide emissions.

The cap and trade method of reducing emissions, which Sandor helped construct, was a success as sulfur dioxide emissions were reduced by 50% over a 10-year period. That success led Sandor to work on a similar scheme to reduce carbon emissions. Throughout the 1990s he planned, lectured and gave testimony regarding a market mechanism to reduce carbon emissions. In 2000 Sandor was awarded a grant form the Joyce Foundation to look at the feasibility of trading carbon and the CCX was born with Sandor as its chairman and CEO.