IN THE competition for most inauspicious introduction to finance, Terrence Duffy, the executive chairman of CME Group, must surely be the winner. Soon after convincing his mother in 1981 to borrow $50,000 so he could buy a seat to trade futures on what was then known as the Chicago Mercantile Exchange, he lost $150,000 because of a misheard order. The anecdote holds a number of lessons: how quickly money can evaporate in the futures market; how trivial the cause can be; and how important it is to honour an agreement (at least in this area of finance). But the most important lesson became apparent only belatedly: a disastrous trade can be offset by a big bet gone right. In Mr Duffy’s case that was joining an institution which has become one of the finance industry’s brightest stars. It did so largely unnoticed by the public. Tourists continue to line up outside the historic building of the New York Stock Exchange on Wall Street, hoping to see the inner workings of capitalism—even as the NYSE is becoming increasingly irrelevant.

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The magnitude of CME’s success is easy to miss. Its quarterly earnings, reported on May 2nd, were mixed. Profits dipped.

The fear that prompts firms to purchase futures (the contracts traded on the CME to protect firms against changes, for instance, in the level of a currency and the price of energy) was less acute. A little more havoc would have been good for business. Yet CME’s growth in recent years has been nothing short of spectacular (see chart). It now boasts a market valuation of more than $20 billion, nearly twice as much as Intercontinental Exchange (ICE), another rising star in the financial firmament. The NYSE is, meanwhile, now worth less than $10 billion.

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When Mr Duffy joined the Chicago Merc, relationships with key companies were considered a financial firm’s most important asset. That was certainly true for J.P. Morgan, Dillon Read and Morgan Stanley, then among the leading banks, and for the NYSE. But the fate of these firms shows that such relationships may not help much: two of the banks were absorbed in semi-distress sales; the NYSE will soon be swallowed by ICE.

Financial market integration is a central concept in international 'integration of emerging market economies into the world financial markets is generally followed by a significantly larger and more liquid equity market' In integrated financial markets, domestic investors can buy foreign assets and foreign investors can buy domestic assets. Topics include pricing in the foreign currency and Eurocurrency markets, use of forward exchange for hedging, short-term returns and market efficiency in the international money markets, foreign currency options, international capital asset pricing, pricing of foreign currency bonds, currency swaps, Eurocurrency syndicated loans, foreign currency financing and exposure management.

Morgan Stanley survives, but is in search of a viable strategy. In contrast, the Chicago Merc’s business was tied to products, not customers. At first, it was eggs and butter, then cattle and pork bellies. The Chicago Board of Trade across town, once the more successful exchange, dominated trades in wheat and corn. The two did not really compete because product-oriented exchanges in particular benefit from strong “network effects”.

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These mean that more members are better: the more trades exchanges handle, the more liquidity they can provide and the more activity they attract. The CME managed to benefit from the same virtuous cycle in futures. It was not the first to offer contracts on currencies, but it had the best timing. Leo Melamed, the Chicago Merc’s chairman from 1968 to 1973, had learned firsthand about the value of currency trading from the black markets in Tokyo, where he lived briefly as a refugee from Nazi Germany. When the Bretton Woods system of fixed exchange rates fell apart in 1972, CME was quick to offer currency futures.

Contracts tied to the London Interbank Offered Rate (LIBOR) and the Standard & Poor’s 500 index followed. This allowed CME to lead the creation of an entirely new class of securities, explains Michael Gorham of the Stuart School of Business at the Illinois Institute of Technology. Between 1972 and 1982 futures, which once locked in prices only of physical commodities, were increasingly used for financial products. These types of futures have since experienced staggering growth and today makes up more than 80% of the business. The CME also negotiated the shift to electronic trading better than its competitors. It was not particularly quick to convert, but it did move once it faced a genuine threat from European competitors. Other American exchanges, such as the once larger Chicago Board of Trade (CBOT) and the NYMEX, which then dominated energy trading, were slower to change.

They were taken over by CME. Leading the pack, the CME was able to benefit from powerful network effects, just as it did in its old business of handling trades in cattle and pork bellies. These effects are even stronger in the case of futures tied to copyrighted indices such as the S&P 500 and because of “proprietary clearing”, meaning contracts initiated on one futures market cannot be transferred to another—much as apps written for the iPhone only run on Apple’s devices. In contrast, options and equities can be traded on any exchange.

This explains why the NYSE’s share-trading franchise has many rivals and lost much of its value. Ordinarily, a big market share supported by strong network effects—which help deter competitors—would attract the wrath of trustbusters. But CME has been left alone so far. In fact, it may now benefit from new regulation, passed in reaction to the financial crisis. Clauses in the Dodd-Frank act require more products to be cleared on exchanges, which will push business CME’s way. CME does face long-term competition: others may innovate around it. But, as in the case of Apple, the CME’s main problem is to develop new markets.

It has begun offering niche products tied to areas like a single harvest or debt with an unusual term structure, such as four years rather than five or ten. That may seem trivial, but such iterations add up to something bigger: CME is evolving into an ever more sophisticated institution that plays a key role in many sorts of financing. If tourists want to get a glimpse of the inner workings of capitalism, they now have to make a trip to the lovely city of Chicago.

The shock of the financial meltdown has had congressional committees scrambling for their gavels for the better part of a year. Politicians have been discussing how to make sure that such a near-cataclysm never happens again, and, for the most part, they've focused on the need for new regulation. What's called for, President Obama said in March, is 'a financial regulatory mechanism that prevents the kind of systemic risks that have done so much damage over the last several months.'

But all the talk of regulation misses a key point: If we don't know which institutions are doing what-if we don't actually monitor what we've regulated-then that regulation won't work. Indeed, signs of regulators' ignorance about what really goes on in the financial markets have been building up for years. Regulators got a warning in 1998, when a little-known hedge fund called Long-Term Capital Management ( LTCM) suddenly faced collapse over a series of bad bets on emerging economies' debt. It wouldn' t have made news, except that the little fund from Connecticut turned out to be holding 5 percent of the market where financial institutions traded risk with each other. In Washington, the heads of the major financial regulators were frantic. 'When LTCM came close to collapsing in the fall of 1998, that came as a great surprise to the Federal Reserve Bank of New York and to the Board of Governors, even though the counterparties to the contracts of LTCM were the big banks and the big investment banks,' says a highly placed member of the Clinton administration. Yet the authorities didn't learn.

Two years later, the Commodity Futures Modernization Act, whose formulation was guided by a report signed by Alan Greenspan and Larry Summers, removed whole categories of so-called 'over-the-counter' derivatives from oversight, allowing financial institutions to trade these securities in secret. It didn't take long to see what could happen: In 2001, the Enron debacle showed how a single company could use over-the-counter derivatives to accumulate billions of dollars in debt -unbeknownst to rating agencies and its own shareholders. And still the laissez-faire attitude of regulators continued, even through the signal event of this crisis, the collapse of Lehman Brothers, when it became clear that the government simply hadn't understood the extent to which letting Lehman fail would tear the tightly knit fabric of the markets. The current crisis 'probably was the result of inadequate information with too much financial innovation,' says Malcolm Knight, a vice-chairman of Deutsche Bank who led the Bank for International Settlements, the bank of the world's central banks, from 2003 to 2008. Nonetheless, it's possible that policymakers will still continue to miss the point. The solutions that lawmakers and some financial experts are now suggesting-like putting derivatives on markets rather than letting banks and other businesses trade them secretly-do not reveal all of the markets' internal workings, which is why some researchers believe the only way to handle the new economy is with stunningly new ways of collecting data about the global financial firmament, using all-seeing, all-knowing monitoring systems right out of Philip K.

Dick's 'The Minority Report.' The trouble, however, is that, even as these researchers race to finish their designs, skepticism is growing among the very industries that would be monitored by these systems, and by the regulators who might use them. A couple of years ago, this opposition might not have been surprising. Now that we know what's at risk, however, it is probably improvident, and possibly dangerous. The new tools that researchers now envision are meant to foresee crises in financial systems that have become impossibly complicated. 'You want to see the build-up to a crash,' Markus Brunnermeier, a professor of economics at Princeton, told me in a recent interview.

'You want to see it coming on.' Brunnermeier has met with Treasury Secretary Timothy Geithner on several occasions and has collaborated with researchers at the Federal Reserve Bank of New York, the chief implementer of American monetary policy.

Brunnermeier's method for seeing it coming would begin with the data that the Fed already collects. Every quarter, 26 big bank holding companies report a number to the Fed called 'value-at-risk,' which is an estimate of the maximum money they might lose in the near future with a given probability. But, while banks can calculate their own value-at-risk, they can only guess how stable other banks are-which makes them vulnerable to the ill fortunes of those with whom they share thousands of financial ties. This is where Brunnermeier had his insight: What if I knew the relationship between one bank's value-at-risk and the value-at-risk of the entire industry?

Then I could see how one institution's problem spills over to other institutions, and I could focus on the institutions that seem to be at the source of these problems. The data, collected not only from banks but also from hedge funds and insurance companies, would have immediate implications for the firms' activities.

If the data pointed toward a risk pocket during a crisis, the firms would have to stop taking on new risks and stockpile more cash. If groups of firms started to show similar vulnerabilities, computers and human supervisors would see these patterns, ideally before they got out of hand.

But, while Brunnermeier's solution would require collecting new data from thousands of firms, many of which currently report nothing to the Fed, some of his colleagues say his solution-looking at a few key numbers for each institution-does not go far enough. Andrew Lo, a professor and director of the Laboratory for Financial Engineering at the Massachusetts Institute of Technology, sees the global financial system as the universe, where each financial center is a galaxy: a collection of stars, planets and other celestial objects held close to each other by their own gravity-in this case, the trades and contracts that tie them together. If you could chart the entire universe and measure all the forces connecting every object inside it, you would have what economists and other scientists call a network map. To Lo, fully understanding what's going on in the markets requires the entire map-not just one value-at-risk number, but every major transaction that connects one entity to another, reported daily. Another pair of researchers is working along similar lines at Sandia National Laboratories, a government research installation in Albuquerque, New Mexico, concerned primarily with nuclear safety and national security. Until 2001, Robert Glass had been studying highly mathematical topics like how fluid flows through porous materials and the patterns that form in air turbulence.

In 2004, he and Walter Beyeler, an expert on the disposal of nuclear waste, turned their modeling skills to two crucial pieces of American infrastructure: the power grid and the payments system that is the backbone of our financial architecture. Beyeler and Glass started creating network maps of the payments system, and, not by coincidence, they looked a lot like the maps Lo described. 'The basic idea is that a small number of the nodes in the network have a very large number of connections, and there's a very large number of nodes in the system that have one or two connections,' Beyeler says. In such a map, Lehman would have shown up as a node connected in myriad ways to scores of other nodes, including virtually all of the other big financial institutions.

In other words, it would have been a critical hub whose disappearance would cause ripples throughout the system. Mapping proposalshave received at least moral support from Democrats. 'I think there is a lot of potential here-in fact, Andrew Lo has been talking to my staff,' says Congressman Barney Frank, whose Financial Services Committee is slated to hear testimony on systemic risks in the next couple of weeks. 'But we're not going to prescribe that; we're going to empower that.

These are specifics that should be decided by the regulator, and not by Congress.' But even the regulators themselves are skeptical.

'We're not the National Security Agency with total information awareness,' says a senior official from the Federal Reserve Bank of New York who insisted on anonymity. 'When you start to get to the type of information that would be required for the network maps, I think there would be a real reticence on the parts of the sovereigns and the institutions to provide that information.' So far, the financial industry's reaction has been to discount the feasibility and usefulness of network maps. Its trade group, the Institute of International Finance (IIF), decided to set up its own market monitoring group to 'connect the dots' and 'build a systemic picture' of the markets, yet it stopped short of recommending a network map. 'The practical and the concrete tools to have people do this are still being developed,' says Hung Q. Tran, the IIF's senior director of capital markets and emerging market policy.

'It's difficult in many instances to see how relevant information can be collected and made available to people at the right time.' The mappers' plans need to be more specific, too, said the Fed official. 'There would be lots of different types of network maps,' the official says.

'There would be funding maps. There would be hedging maps for different types of market risk.

Some of that we've been able to get further on, but I don't think we'd ever be able to get the full view of the market.' Yet, even if the United States balks, other countries may go ahead with network mapping. In February, Otmar Issing and Jan Krahnen, members of a commission advising the German government, wrote in the Financial Times that a global network map was 'a vital element' for preventing future crises. And the main consultative document prepared for the European Union also recommended a map of global risks. But, without cooperation from the United States, any supposedly global map will be woefully incomplete.

In the end, the question may be whether Washington is finally willing to stand up to the industry. For its own sake. Daniel Altman is president of North Yard Economics, a nonprofit consulting firm serving developing countries. He is writing a book on the future of the global economy.