Competition in the commodity and financial futures business is the fiercest in history. Reflecting this trend, the Chicago Board of Trade, the world's largest commodities market, has more than doubled in size this year.
Some call it "the whole of capitalism in microcosm." Other call it "a zoo."m
"Fifteenannahalf, seventeenannaquarter, fifteen, twenty-five, sixty more!"
"Sell at tennannahalf!"
"Sell a quarter!"
The shouting on the floor of the Chicago Board of Trade is all-out, rivaling, in its way, the din at the Super Bowl. But if it assaults your ears, it also makes the price of your breakfast cereal -- among a thousand other things -- easier to swallow.
Put another way, the trader's hands go up and down here so the price on the boxtop doesn't have to.
Members of this exchange trade everything from soybeans to gold -- but mostly US Treasury bonds. They buy and sell for farmers and brokers from Australia to Arkansas, from Tokyo to Tennessee. For the privilege of bellowing and pushing 4 1/2 hours a day, five days a week, a seat on the exchange costs anywhere from $ 25,000 to $275,000, plus dues. And, yes, there is a long waiting list.
Futures trading is a neat system, even if economists don't always pay it tribute. To them, the effect of commodity futures on so-called "spot" prices is highly controversial.
It's also no place for amateurs. Commodity markets are a zero-sum game, meaning that what one participant wins, others lose. Studies have found that usually only insiders make money with any consistency.
"The advantage," admits Bill Murschel, the Board of Trade's media relations director, "goes to the person with information."
"Trading Places," the new comedy starring Eddie Murphy and Dan Aykroyd, glorifies the importance of inside information. In it, the two men purloin a Florida orange crop report, substitute a fake one, and become millionaires in the process.
In recent years, the Board of Trade has become far more than the trading center of agricultural commodities set up 135 years ago simply to lend some stability to the grain business.
Exxon, Gulf, and Texaco have used the exchange to deal in energy products. Weyerhaeuser and International Paper have traded here. So have the Hunt brothers, those famous Texas oilmen who some thought were trying to corner the market in silver a few years ago. Indeed, since money itself is a price-volatile commodity because of fluctuating interest rates, the newest trend is financial futures.
Earlier this month, in fact, the exchange set a one-day record for trading 30 -year Treasury bonds: 143,474. That's six contracts a second.
Speculators buy gold, silver, wheat -- what-have-you -- in hopes of making huge profits before delivery time. By paying close attention to what affects prices -- everything from crop reports to exports -- they hope they can come out ahead.
Speculation provides the liquidity (ease of buying and selling in the market due to the prsence of a large number of buyers and sellers) necessary to make this risk transfer -- called a "hedge" -- possible.
"We purchase . . . from all segments of the market -- from elevators to farmers," says Thomas Weidner, manager of Maumee Grain, a large Midwestern dealer. "then we immediately hedge that grain by selling futures on the Chicago Board of Trade." After purchasing grain (nearly 175 million bushels a year), Maumee sells to exporters, processors, and feed companies.
"The Board of Trade reflects market conditions; we do not make market conditions," says spokesman Ray Carmichael.
But that doesn't stop the occasional grain farmer who's just lost money on a bumper crop (because the market has shrunk) from using the exchange as a scapegoat, Mr. Carmichael concedes.
Down in the piis, traders furiously scribble their costly transactions on tiny sheets of paper -- which they promptly throw on the floor. Just as quickly , messengers, or "runners," scoop them up and race to a bank of phones and teletypes to inform clients around the globe -- a Belgian food processor, say, or Austrailian wheat farmer -- that their transactions have been made.
In return, the trader gets a fixed fee for each contract traded. Depending on how fast his hands and eyes can move, his ears hear, and his fingers write, he or she (there are a few women here) can make from $30,000 to upwards of $1 million a year.
"In this business, with the margin of profit changing from day to day, the processor who deals with quantities like ours must follow the futures market very carefully," sayd Fred DeRoost, general manager of Vamo Mills in Izegem, Belgium, a major processor of soybeans.
"We mainly use the futures as a hedge," he says. "[But] we also hedge what you call the crush: We buy the beans and sell the products on the futures markets, or do the reverse crush -- sell the beans and buy the products."
At times, DeRoost says, European prices will be on the low side and Chicago's on the high side. When this happens, his hedging specialist trades "the spread" between different contracts, trying to realize a gain that offsets some of the mill's import costs.
Ray Burton, a vice-president of the Burlington Northern Railroad, happily recalls the time here three years ago when his company hedged a $125 million bond issue with a bond futures contract -- and it worked.
"The bond market had turned sour, and we were concerned that by the time the bonds were offered market prices would have fallen," he says. "So, 10 days before the issue, I sold $65 million in US Treasury bond futures contracts at the Chicago Board of Trade."
The market continued its downward trend. But when he bought back his futures contracts at the time of the bond offering, the company had gained money on the futures transactions to offset in part the higher interet rate which had to be assumed on the Burlington Northern bonds.
Futures, Mr. Burton says, are a useful tool "which allows us to make future decisions today."
The Board of Trade handles 45 percent of the futures trading volume in the United States (48 million of 112 million contracts traded last year). With its new 32,000-square-foot trading floor added to that of the old, the exchange has nearly a football field's worth of space in which to trade. It has a permanent staff of 450 people.
(This city is also the home of the second-largest futures market, the Chicago Mercantile Exchange -- of pork bellies fame.)
On this particular morning, just before 9:30, close to 2,000 traders are spread amorphously across the grain floor like the delegates at a political paaty convention. But when the gong rings to start the trading, organized bedlam sets in.
Each of the eight pits seems to metamorphose instantly from inactivity to full-scale argument.
Each pit is reserved for a single commodity, and a trader's position in it designates what month he is trading for -- January beans, say, or December corn. There is no cental auctioneer; traders are free to buy and sell with anyone.
As chaotic as the yelling and hand-waving appear, they are clear to traders.
Palm facing trader means "sell"; facing away means "buy." The number of fingers on one hand in a vertical position indicates the number of contracts the trader wishes to buy or sell. Since electronic boards tell every trader what the price is at the moment, he need only signal (with his other hand) what fraction of a cent he is willing to buy over that price: Closed fist means one full cent, four fingers mean three-quarters of a cent, four spread fingers mean a half-cent, and two spread fingers mean one-quarter of a cent.
And speculators are well versed in everything that can affect the price of commodities. Consider wheat:
Each year a speculator must worry about such factors as the acreage planted, weather, growing conditions, export demand, and crop conditions in competing countries, like Canada, Argentina, Australia, and others, Mr. Murschel says.
The pace is hectic.
Argo Parrello, who has been trading here since 1953, says: "The most important things [are] quickness, hands, eyes, and ears. You've got to be able to hear when someone across the pit has what you need, get his attention before anyone else, make the transaction, and get on to other orders."
It helps, he says, to be tall and have long arms.
Still, mistakes do happen. Orders to buy corn are sometimes delivered to the soybean pit. In their haste, traders sometimes misinterpret orders for quantity , reading, say, 50,000 bushels instead of 5,000.
But "the trader is responsible for it," Mr. Parrello says. "The client outside the pit never suffers by a trader error. The most I've lost is $20,000 in a day -- $60,000 in a year.
Kevin Baran, until recently a runner, has a different view of the Board of Trade.
"You've got, maybe, 2,000 people on that little floor, all pushing each otther," he says. "And near the end of the day, when they have to get their orders in under the wire, they're like stampeding cattle."
"There's nothing like it in the world," Mr. Baran claims. "It's definitely interesting, but it's a zoo."
That hasn't stopped the demand for seats on the exchange. In practice, seats change hands on a daily basis as traders find reason to jump in or drop ouu. A trader may buy, say, 15 seats, use a dozen of them and lease the rest to someone else. Or he may choose to sell a seat because its value has increased dramatically since he bought it.
"The increased demand for seats and the construction of the new facilities has been really dictated by the growth of the markets," says Gene Podrazik, the board's director of public affairs.
Treasury bond futures alone, which are the the world's most actively traded contracts, "went from zip to almost 17 million" between 1977 and 1982, Mr. Podrazik says.
The point is, he says, "The Board of Trade has historically been a price risk-transfer mechanism for the agricultural community. But it now recognizes that risk exists in other areas of economic life."
Traders, says Ray Carmichael, are "very strong entrepreneurs, very independent people. They're intense. They thrive on fast-moving investments. You have to, to survive."