The biggest game in town
Eisendrath, John
The biggest game in town The biggest crap shoot around can't be found in Las Vegas or Atlantic City. You'll find it in the commodity pits, and it's called the stock index futures. Skeptics have...
...Today, to pay $1 million in stock, you must put down $500,000 initial margin...
...What distinguished commodity markets from casinos, Holmes felt, was that there was an actual obligation to take or make delivery of the commodity being traded, even it that obligation was completely academic to most of those who bought and sold the contracts...
...rather, they are betting on the movement of a group of stocks...
...We'll threaten to abolish stock index futures altogether...
...John Eisendrath...
...No wonder finurcs rather than stocks, have become the modern growth industry for speculation...
...Grace complains that stock futures "will tend to shift individuals from long-term investors, where they are greatly needed, to speculative traders" Such speculation, says Ice Iacocca, ''will not result in any additional basic investment in plant, equipment or research and will not create are new job...
...J. Peter Grace of W.R...
...It is called margin control...
...Skeptics have long considered commodity trading little more than a rarified form of gambling...
...And if the boys on la Salle Street won't play along...
...In this case, traders aren't buying and selling carloads of oranges and sorghum to be delivered at some point in the future...
...In 1034 President Roosevelt proposed raising margins on both stocks and futures, invoking the unregulated speculation that preceded the 1929 crash...
...Back in 1905, Justice Oliver Wendell Holmes pondered this argument in a case before the Supreme Court and sided with the traders...
...To buy $1 million in stock index futured you need to put down only $100,000...
...Happily, there is at least one convenient and effective means at hand to moderate the speculative orgy...
...The lure of the crap shoot worries a number of corporate executives...
...If you guess correctly you're paid in cash...
...The introduction in 1982 of something called stock index futures would have made Holmes think twice...
...The difference in marginn requirements is a result of political, not economic, history...
...Their fears seem to have been realized: in a year and a half the Standard & Poor 500 index has become the fastest-growing futures contract in the commodity industry's history...
...The traders response is that what's important is not how many garages are filled with pork bellies, but that every trader's garage could he filled...
...If we raised the margin for stock futures to 50 percent, however, we could cool the speculative fever that is diverting capital from stocks to stock futures...
...Congress followed FDR's advice and raised securities margins, but refused to raise margins in the futures markets, The result is today's speculative boom...
...The most widely used is Standard & Poor's 500 index, traded on the Chicago Mercantile Exchange...
...Atter all, they argue, only 4 percent of all commodities traded are ever delivered-the rest are bandied about like so many chips at a poker table...
...If you think the stock market is heading higher, but you are not sure about any one stock, you can play out your hunch by buying one of the four stock index futures contracts now trading...
Vol. 15 • October 1983 • No. 7
