DEAD END on La Salle Street
Eisendrath, John
DEAD END on La Salle Street BY JOHN EISENDRATH In the movie Trading Places, there is a scene in which a hip vagrant, played by Eddie Murphy, is about to become the head of a Philadelphia firm...
...One guy took me aside and said, ‘See that guy over there...
...Last year alone more than 500,000 businesses were started in this country, and in the 1970s more businesses were started than in any previous decade...
...Inflation up...
...Unlike the scalpers who are constantly buying and selling, Dennis takes a position and holds it-for a day or a week or even a month...
...George Tomlinson, who left the ceramic tile business to come to the Chicago pits: “It’s so clean and neat here...
...In a business filled with risk-takers, Richard Dennis is the biggest risk-taker of them all...
...His father worked for Commonwealth Edison for 46 years...
...I didn’t spend any money from that day on...
...Useful as this hedging function is-and in today’s uncertain economic times it is extremely useful-insuring against disaster is a far cry, from preventing it...
...For trading purposes, each lot has been divided into increments of $31.25...
...They take a position and sit on it-betting on long-term trends, not minute-to-minute fluctuations...
...It’s a lightning rod for those who don’t like the risk-free society...
...About the first two attributes, he explains: “The market is a battle of wits, a test of wills, a rorschach for the way you discipline yourself...
...When the bell sounds at 8 a.m., signaling the start of trading, the pit explodes...
...And they lead exciting lives...
...What we should do:’ he said, “is write the government a note, saying ‘Our justification for this contract is that people use it...
...The markets themselves will do nothing to correct what is wrong!’ That might not be so bad if it weren’t that an increasing number of those who might otherwise be correcting what is wrong with the economy weren’t so tied up with cushioning the blow...
...INTIMIDATE THE MARKET” The traders in the pit do not generate their own trades-they do not make money off of each other...
...Or he might buy Treasury bonds and sell Treasury notes, to make money on the price difference...
...The street kid catches on right away...
...Of the more than 300 people in the bond pit each day, for example, about 100 are brokers...
...Just put up your money and start...
...What’s one to make of the people in the pits...
...it’s a lot like leasing a taxicab...
...Over the next ten years the occupations with the largest percentage increase will be paralegal personnel and data processing machine mechanics...
...When there were huge surpluses, prices plunged...
...Griffin became the expert on the new contracts...
...To protect against this feast-or-famine cycle, a system emerged that allowed both producers and consumers of agricultural goods to hedge against the chaotic prices...
...If you panic you’re gone-and so may be your house, your car, and just about everything else...
...It’s a long tough.road out there...
...SECRETS OF A FURNITURE SALESMAN In the insular world of commodity trading, Richard Dennis is considered something of an oddball...
...The unlucky farmer whose timing was wrong could end up bankrupt, even with a bumper crop...
...Ray Cahnman isn’t in the pits much now...
...A sharp increase in the price of corn-like the one that resulted from last summer’s drought-could wipe out the company’s profit...
...The market rises and falls on the basis of bids and offers of the traders in the pit...
...By 759 a.m...
...It’s security...
...The traders are there to provide the liquidity necessary for the broker to fill his order...
...The purpose of the futures markets is to cushion the blow of the bad economy, ” says Richard Sandor, the man who invented financial futures...
...As economist Robert Samuelson has noted, Americans have developed a predator ethic which now rivals our producer ethic...
...This, too, is part of the pit-trader mentality: a desire to live on the edge, to constantly be at risk...
...In the bond pit, for instance, the only real lull during the six-hour trading day comes each morning at 10:30 when the Federal Reserve makes its daily announcement about the money supply...
...DEAD END on La Salle Street BY JOHN EISENDRATH In the movie Trading Places, there is a scene in which a hip vagrant, played by Eddie Murphy, is about to become the head of a Philadelphia firm that speculates in “futures...
...so it should come as no surprise that when Dennis surveyed the economic landscape recently, trying to find a suitable investment for $5 million in loose change, he didn’t opt for the stock market-an investment that might provide companies with capital to help retool their plants...
...While pork bellies and soybean meal are still traded, futures are more than just a farmers market now, as Citicorp, Goldman Sachs, and every other New York financial institution clamoring to get into the futures markets will attest to...
...Scalpers, who comprise the majority of locals, make hundreds of small trades each day, trying to take advantage of the constantly fluctuating price of the market...
...Since Mistretta is one of the largest single buyers and sellers, his position directly affects the positions of others...
...Then there are the spreaders-traders who take advantage of shifting relationships between different commodities or between different delivery months of the same commodity...
...Everyone wanted it and to a certain extent we’ve got it...
...Fine...
...If you’re a nobody and you need a modest amount of capital to start a business, chances are you’re not going to get it...
...There’s a lot of psychology involved in the pit:’ he says...
...Lacking their own storage facilities and needing cash to pay their bills, farmers would bring their entire crop to market as rapidly as it could be harvested...
...Even better...
...It’s everywhere-the unions, the big corporations...
...One bond contract is worth $100,000...
...Here’s a textbook example of how the markets work...
...Sincerely, the Chicago Board of Trade...
...Hang around La Salle Street long enough and you begin to understand why he may be right...
...at the Mid-America Exchange there are 1,205 members, five times more than a decade ago...
...If you spend some time in and around the pits, however, and look beyond the money and the macho, you may come to see different conclusions...
...any announcement or event that might affect a given commodity is quickly relayed into the pit and translated into a higher or lower price...
...Everyone wants to limit their risk...
...In the commodity business, you don’t need that capital-but if you did, you’d probably get it anyway, since commodity traders are a banker’s dream...
...Then there is the fact that a lot of the new businesses-many of them specializing in services-offer work that appeals to someone with the pit-trader mentality...
...I grew up in Chicago and have known about the pit all my life, but when I recently stepped into the octagon-shaped area where bond contracts are traded, I was still unprepared...
...Another barrier is the cost of entry...
...The purpose is to make money...
...Still, a good broker can make as much as half-a-million dollars a year...
...everyone is screaming...
...What’s unfortunate is that the risks taken by those would-be entrepreneurs aren’t being made in the sector of the economy where they’d do the most good-the industrial sector...
...He would trade every minute of every day, even after he became wildly successful-very much a millionaire...
...Unfortunately, the kind of capitalism that’s practiced often creates the barriers that send peo- ple into the pits for relief...
...In this respect what matters is not Paul Volcker but something more instinctual and more subjective...
...With no overhead, and the chance of making a killing ever-present, commodity traders have easy access to credit at the Chicago banks...
...If you can play the ticks, sense the market’s direction, and remain calm even when one wrong move may mean being wiped out, you can thrive...
...Another broker in the bond pit, Robert Griffin, got the credentials his father and grandfather never had, and discovered they were worthless in the pit...
...It is very solipsistic!’ It is also brutally objective-a fact which necessitates the third attribute...
...Some do panic, but they don’t last very long...
...But security has had its costs-in rules and regulations and in its effect on those who wanted to take risk...
...There are fewer places for those kinds of people today...
...I wanted to work for myself...
...No one lasts in the pit if he panics...
...I get it:’ he says, “you guys is bookies!’ That description of the booming commodities industry captures the heady risk-taking that goes on in the commodities pits as well as its dubious social utility...
...Last year Richard Dennis took the right positions: he made more than $40 million...
...Good traders know that sometimes, many times, they will lose...
...Dennis chose instead to start up the Roosevelt Center, a think-tank in Washington...
...Good traders:’ says Griffin, “have a very blue-collar attitude...
...It’s hard to envision Ray Cahnman running a travel agency or writing computer programs-particularly since he worked for a computer time-sharing company before coming down to the Board and hated it...
...The major risk Company X faces is a possible increase in the price of the several thousand tons of corn it must purchase to feed its cattle...
...They accept this as fact and don’t panic when the market moves against them...
...Mistretta dropped out of high school in 1976 and was working in a gas station when a friend of his father’s gave him a part-time job as a runner in the pits for $60 a week...
...Good pit traders, they look at this stuff, but when they’re in the pit and they’re making up their minds as to what’s going on, they only look at who’s stronger, the buyers or the sellers...
...In one respect this fluctuation represents the distillation of a lot of economic information...
...Capitalism-and entrepreneurship-is just as alive and well outside the commodity markets...
...In this sense the trading pit and Washington, D.C., are not such strange bedfellows...
...Some traders trade a lot at a time, some ten at a time...
...Unlike Wall Street, futures markets thrive on adversity...
...Nor did he decide to bankroll a business of his own that might produce something...
...By buying futures contracts for the quantity of corn needed, the owners know roughly what their feed costs will be before they contract with the packer on a selling price for the finished cattle...
...He would still desperately fight with other traders-even for the one lots...
...He was so disciplined and aggressive:’ Griffin says of Cahnman...
...more than 300 people-mostly men in their mid-20s-have wedged their way into the bond pit and are standing toe to toe in the pastel-colored jackets traders wear to identify the clearinghouses through which they trade...
...He used to be a furniture salesman...
...This comment has more meaning than first appears...
...All these facts relate to what struck me most about Cahnman today...
...Says one trader: “I listen to the economic information, but I don’t really play off it...
...One trader describes why he likes the commodity pits: “There are no bureaucratic hierarchies, no off ices, nothing...
...All told there are almost 6,000 commodity traders in Chicago...
...I tried real hard and I got nowhere!’ He worked for a bank and for a computer time-sharing company...
...Mistretta knows this and uses it to his advantage...
...They don’t want the burden of putting out a product or of employing others-they don’t answer to anyone and they don’t want anyone answering to them...
...He fought with guys one onethousandth of his size for every tick!’ Cahnman didn’t start trading until he was 30...
...There are no unions and there is no security-a trader can go to work in the morning and, unlike almost anyone else, come home at night poorer than when he woke up-a lot poorer...
...Those who run American businesses, big and small, often will take in a young partner or manager only if he or she has an MBA-and a prestigious MBA at that...
...Griffin says, “He did!’ The reason is that the only smarts you need on the floor are street smarts...
...Business schools teach people how to become bureaucrats, not entrepreneurs-something many American businesses today think is just fine...
...When the market moves in the bond pit, it does so in $31.25 increments...
...John Eisendrath...
...In recent years his analysis has told him that the economy was going down the tubes and that there was a lot of money to be made on the recession...
...is a staff writer for the Chicago Reader...
...Remember the buzzwords: “clean” and “neat” and “clead’ There is nothing clean and neat about a tailor shop-or about most of the businesses that we could use more of today, When I suggested to Griffin that perhaps there are enough contracts being traded and enough boys in enough pits trading them, and that the rapid growth in the industry may be siphoning off valuable capital-both in minds and in money-he said that the mere fact that people used the markets justified their existence and their growth...
...This is more streamlined...
...Brokers have longer life spans than traders because they have less liability...
...If I found empty bottles, I would turn them in and get the 2 cents...
...All around the pit, TV screens display what is happening around the world...
...So if you hold one contract and the market rises ten ticks, you’ve made $312.50...
...He was even a tennis pro...
...When I came down here I found out this thing was only a game, and vowed that no matter what, I was going to make it...
...Life is clear down here...
...And, like most of his successful colleagues, he has three qualities essential to a good trader: discipline, fierce independence, and, in his business life, a total indifference to the welfare of the economy...
...In addition to having the confidence that allows them to risk a lot of money on a splitsecond decision, good traders must constantly deal with another factor: fear...
...One of the biggest and best brokers in the bond pit is Scott Mistretta...
...where am I going to get out...
...lhlk with enough traders and you will find they agree with Dennis...
...those with venture capital are lured by flashy proposals that promise quick, high rates of return...
...To understand the dynamics of the futures business, to know how money is made and lost, you have to know who’s doing all the screaming and why...
...Many of the reasons they give for being there are simply excuses...
...In this sense the futures markets and traders like Cahnman, instead of being vastly different from the rest of the economy, are really just a microcosm of it...
...He runs one of the clearinghouses at the Board through which all traders must operate...
...When he went into the pit he got creamed...
...Large banks prefer to lend in large lots, cutting down their own paperwork...
...While the screaming and gesticulating and the pushing and the shoving go on unabated throughout the trading day, it reaches a pitch whenever Mistretta uncrosses his long arms and enters the fray...
...He is the consummate position trader...
...Every journalist who writes about commodity markets finds the Ray Cahnmans and the Scott Mistrettas irresistible copy...
...Cahnman’s specialty was-and, when he trades, still isspread trading...
...The market is a phenomenon you try to analyze and not wish around:’ says Dennis, who makes his decisions based on a complex program that he relays to the 13 brokers who work for him in every pit from wheat to gold (Dennis himself no longer trades from the floor...
...There are no bureaucratic hierarchies, no offices, nothing...
...In the past three years the membership at the Chicago Mercantile Exchange has gone from 1,250 to 2,000...
...The conditions which cause the markets to thrive are symptoms of problems in the economg’ he admits...
...They arose out of the wild price fluctuations that plagued American agriculture a century ago...
...This is the most complex form of speculating-and the fastest growing...
...He knew everything there was to know about them-except how to trade them...
...The whole push of society for the last 50 years has been to reduce risk for everyone-with Medicare, welfare, Social Security...
...While most brokers fill tenand 20-lot orders, Mistretta rarely handles orders for less than 200...
...Spreaders and scalpers, unlike position traders, don’t care if the market goes up or down...
...Commodity trading is an industry that has boomed amidst the economy’s bust...
...In this sense too the markets are an anachronism: they are a place where credentials are meaningless...
...Then a friend told him about commodity trading...
...Think of it: no offices, only a closet to hang your jacket...
...I got out of grad school [in business] at 24 and out of the Army at 25:’ he recalls...
...As one trader put it: “When you’re long 50 contracts-and in bonds that means you’re risking fifteen hundred bucks every time the market hiccups-you start thinking not about the money you’re going to make, but what am I going to do if I lose...
...Commodity traders have taken advantage of these opportunities, joining the country’s ever-growing maintenance crew-the people who have nothing to do with the inputs and outputs of society but are well paid and quite content just to fine-tune and to lubricate...
...He is a glamorous broker, a market maker, someone everyone in the pit keeps an eye on...
...That’s all you think about...
...A lot of traders probably view the pit as an interesting-though treacherous-harbor in an extremely boring sea...
...I was almost 26 when I got my first job...
...Peter Gallagher, who worked as an accountant before coming to the pits in 1975: “The reason people come down here is because here aggressiveness and hard work pay off-there are immediate returns...
...Robert Griffin got a prestigious MBA and found it was worthless in the pit...
...We’ve developed the illusion of the riskless society...
...I had all these academic credentials and when I first got down here I was told I knew too much...
...What I noticedwatching him on the floor, in a morning strategy meeting, and in discussions with other traderswas that if futures trading is indeed a game, then Ray Cahnman is a man who knows all the rules...
...Say Company X operates a large cattle feedlot in the Midwest...
...There is another side to the fluctuation in prices, however, one that you can see only from a pit’s-eye-view...
...You also realize the opportunities available to someone who can grasp this complexity...
...Perhaps it is fitting that the boys in the pit are hailed as the entrepreneurs of the eighties, since it is to our growing streak of selfabsorption that commodity trading caters...
...The boys in the pits don’t want responsibility...
...In trader parlance each contract is called a “lot...
...Most commodity trading goes on in the pit-a place so filled with pandemonium that there is no preparing for it...
...Damn the economy, full speed ahead...
...By buying a futures contract-a promise to purchase a fixed quantity of a certain good at a fixed price during a certain month-and later selling it, businessmen could protect themselves against rising prices of commodities they planned to purchase...
...The locals’ function is to provide a liquid market for all the Company Xs that need a hedge against uncertainty...
...Call it a perversion of Adam Smith: some of our biggest risk-takers are now in the insurance business...
...Although the people who play the numbers games in the futures markets are risk-takers, the markets themselves, paradoxically, are like insurance-their primary function is to reduce risk...
...The predator ethic has arrived...
...Today if you offer Mistretta $10,000 a day to be your broker, he’ll say he will have to think about it...
...I may not want to do anything, but I make it look like I want to do it to intimidate the market...
...When Scott Mistretta screams, traders in the bond pit listen...
...To hear one commodity trader tell it, the financial center of the country is rapidly shifting from Wall Street to La Salle Street...
...Perhaps...
...Almost all of the trading is initiated by brokers filling orders for outside customers who are using the market to reduce risk...
...Although traders would be loath to admit it, the pit is not the last outpost of capitalism...
...the fact is that many are drawn to the pits by the glamor and the complete lack of responsibility...
...The really big traders-usually position traders-deal in 100 and 200 lots...
...For them this is the last outpost of capitalism...
...In the pit there are both brokers-whose job is to fill orders for outside customers-and speculators (called “locals”), who trade only for themselves...
...He’s going to do a lot better than you are...
...Even if he hadn’t lasted 12 years in a business where 80 percent of the people go belly up and the ones who don’t often take the money and run, and even if he were not a liberal Democrat in a sea of conservative Republicans, the traders in the pit would know about Richard Dennis...
...With each new contract, several different ways of spreading arise...
...Still, one can’t help think that in many ways those who descend into the pits are simply succumbing to the path of least resistance...
...One place is here...
...They can make money-sometimes a killing-as long as the market moves...
...They provide a ready market of buyers and sellers to take the opposite side of the hedger’s orders...
...Uncertainty...
...In Chicago, where threefourths of all futures trading occurs, the largest growth has been in financial futures-futures contracts based on financial instruments like Treasury bonds and Treasury notes whose price fluctuates with changes in interest rates, as well as contracts based on stock indexes (see sidebar, page 26...
...The sad thing is, I think he was perfectly sincere...
...Yet, as Mistretta candidly admits, that hand is not so invisible-and as the markets continue to grow it may be even less so...
...Like almost everyone else in his profession, the 34-year-old Dennis, a big, thoroughly disheveled man with an unassuming manner, grew up in Chicago...
...Spreading, remember, is that peculiar breed of trading that involves, among other things, playing different commodities against each other...
...When you talk with him you realize how complex the industry has become...
...One barrier is the increasing importance of credentials...
...The Treasury bond contract would be dead as a doornail if there Was no debt and inflation was 2 percent...
...His job is much more than filling orders-it is sensing where the market is going and getting the best price for his customer...
...Despite the fact that he profits from its problems, Dennis is a man who seems to think a great deal about the welfare of the economy...
...I didn’t care how long it took!’ From 1979 to 1981 Cahnman traded more in terms of volume than anyone in the bond pit...
...Griffin went to business school at the University of Chicago and then to work in the research department of the Chicago Board of Trade, the oldest and largest commodities exchange...
...In the cherrypaneled, Persian-rugged opulence of the firm’s inner sanctum, the owners explain to Murphy how futures speculation works...
...These are called “ticks...
...But if crop supplies began to run short, there was panic buying and prices skyrocketed...
...Ask anyone why they have chosen trading as a career and the discussion invariably turns to what is wrong elsewhere...
...The people in the pit become a blur of hand-signaling and arm-waving...
...Not only does this assure the company a profit, it also keeps the price of beef down by enabling the company to agree to a lower selling price for its cattle...
...It is the ability to think fast and act decisively...
...While many critics of the commodity industry voice legitimate concerns about regulatory problems, about the potential for another Hunt-like debacle, and about the drain on capital caused by excessive speculation, there seems to be a more alarming problemthe drain on human capital...
...And you know what...
...They see the wooden pits in which they stand as a place to make an honest buck...
...That was in 1975, just when financial futures were beginning...
...to chance losing $1,500 on a hiccup...
...The reason...
...It’s the pit-trader mentality...
...I saved everything I could...
...It was a windfall for the farmer, but the consumer suffered...
...WE NEED INFLATION” Of course, it doesn’t look like the insurance business...
...For four years I just bummed around and tried various things...
...There just aren’t that many businesses today that you can start for $5,000-an amount that could lease you a seat on the Board of Trade and let you take your chances at becoming a millionaire...
...No secretaries, no memos, no management, and no indication of who is making it and who is not...
...A spread trader may simultaneously buy March corn and sell May corn, hoping to make money on the price difference...
...What these markets need-and perhaps what the players in the market need-is volatility...
...Says one scalper: “We need instability and we need inflation!’ In the bond pit the subject of the screaming is long-term Treasury bonds...
...A broker .must have many of the attributes of a trader...
...This is no less legitimate than scalping or position trading, but through its complexity, it raises an interesting parallel...
...Griffin grew up in Cicero, Illinois, a middle-class suburb of Chicago where, for some reason, many traders grew up...
...By reversing the procedure-selling a futures contract and later buying back an equal and offsetting contract-others could protect against a decline in price of the commodities they owned...
...The cattle are fed and sold under a contractual agreement with a meat packer at an agreed-in-advance price...
...Cahnman knows each technique and uses all of them...
...More and more we look upon producing goods as grubby and uninteresting...
...In a business where proximity to a broker can mean the difference between making and missing a trade, some traders arrive in the pit at five in the morning so they can get close to Mistretta when he walks in as the bell sounds at eight...
...Yet while their temperament may be the same, I suspect that in one very important sense these people are a far cry from the old-fashioned businessmen Griffin was talking about...
...as a haven from a world of confused rules and regulations and a place that is quintessentially democratic...
...In other words, if La Salle Street ends up supplanting Wall Street, it will mean the economy has gone down the tubes...
...He estimated that during that time he accounted for one in every five trades-an amazing number considering that in 1981 alone more than 13 million bond contracts were traded...
...The futures markets are justified by the notion that through the invisible hand of the market a fair price is established for a given commodity...
...This side doesn’t concern overall trends in the market, but the minute-to-minute changes on which most people in the pit make a living...
...I made a total commitment that I was going to get this thing...
...Like the economy, the futures markets have grown so complex that opportunities exist for tinkering...
...Again, the law of the pit is the law of supply and demand, and traders’ decisions to buy and sell are based primarily on how strong or weak the demand for a commodity is in the pit at a certain price-if the demand is low, the price offered for the commodity will fall...
...The big hitters are known as position traders...
...They are interesting, certainly...
...He spent five years in the pits, however, and when he was there he was one of the best-the personification of Griffin’s blue-collar ideal...
...These are the people who used to come over from Europe and set up the tailor shops-old-fashioned businessmen!’ So this is what has become of yesterday’s entrepreneurs...
...Such fluctuations are the bread and butter of a second type of local-the scalper...
...Of course, you wouldn’t have to think about getting out if you weren’t already in...
...Trading volume on the 11 exchanges around the country increased from 58 million contracts in 1978 to more than 112 million in 1982, and industry analysts’ are anticipating another doubling in volume by 1985...
...The good traders may not be a venture capitalist’s dream-but they’re close: they are willing to scrape and claw their way to the top...
Vol. 15 • October 1983 • No. 7
