The Rose-colored Glasses Come Off
Chicago's futures exchanges had some bad apples amongst an otherwise good bunch
I’ve been listening to the podcast Brokers, Bagmen & Moles and it brought up many faded recollections of working on the futures exchanges. As the podcast reminded me, the exchanges were tough places to work and not everyone played by the rules. Some deliberately operated at the limit of or beyond the rules. This blog started out as my rose-colored glasses recollection of the trading floor: a happy-go-lucky, care-free irreverent place. I had forgotten it wasn’t always that way.
As a reporter, I had a good gig. I had little at risk and was insulated from many of the floor politics. Making a living trading was hard. As mentioned in a previous post, most people didn’t get to work in the pits unless they knew someone. It was a closed society. When I was new I was frequently asked who I knew to get to work there?
The Chicago Mercantile Exchange (CME), where I spent a lot of time, was tightly controlled by a small group. Very little happened on the floor without the knowledge of the top leaders. Things were different at the CBOT, but it was a closed group, too.
The FBI’s investigation of the exchanges in the late 1980s, looked at whether major crimes were occurring on the floor. Dozens of indictments were issued. But based on the number of convictions obtained and what traders were convicted of (mostly minor trading infractions), it could be argued that the outcome was ambiguous. A few traders plead guilty and served prison time. Others were acquitted. All that were indicted faced major life disruptions, loss of jobs and money. They had to pull the pieces back together. The investigations never made it to the top ranks of the exchanges or major trading firms. None of them were indicted for anything.
As an observer there for nine years, I knew the exchanges weren’t a completely clean place. I knew a lot of honest people who worked there. Many pits were said to be more honest than others. But, there were still some bad apples.
My first assignment with Futures World News was to cover the meats — the CME’s livestock futures and options markets. This included: Live Cattle, Live Hogs, Feeder Cattle and Pork Bellies. Reporting the day’s market activity was my focus. I was not allowed in the pits. That meant, I was not privy to the conversations that took place among brokers and locals as they handled customer orders. In social situations outside the floor, those discussions didn’t include me.
Still, I heard stuff. Early on, I learned from my floor sources that the Bellies was a sketchy pit. There were wide spreads between buying and selling prices. The market was known as a place where customers got bad fills — a buy order price that was higher than it should have been or a sell order price that was lower than it should have been.
This was hard to parse out when observing the trading from outside of the pit and as a neophyte to the floor. Over time, I got enough tips and had enough seasoning to understand one likely example of the corruption in that pit.
The market’s opening and closing moments are typically a frenzy of trading activity. Brokers are handling flurries of opening and closing orders. Many people don’t want to hold a position in the market overnight in the event that there’s a move in the wrong direction. They get into the market at the start of trading and get out on the closing bell. In most pits, when the opening activity dies down, brokers and locals would check trades with one another in an effort to avoid errors (known as outtrades).
If you thought that the exchange monitored everything that was going on, that’s not exactly how things worked before the start of electronic trading. The exchange stationed staffers in the pit (price reporters), who kept track of all the prices traded during the session. These reporters did not keep track of how many contracts traded at a price nor who traded with who. It was a porous system. Say the prices $45, $46, $47 and $48 traded in a market’s opening minutes, the only people who knew how many contracts were exchanged and with whom were the traders (brokers and locals) in the pit. In the late 1980s and through the 1990s, the traders wrote down the deals (sometimes in pencil) on trading cards and submitted them every half hour
If a trader missed a deal, they could access the data stream of prices via what was known as a “time and sales machine”. It had a record of the prices and at what time they traded.
As a double check to verify trades this system seemed to be reasonable. However, it could also be used nefariously. Almost daily I saw one Pork Belly futures broker beat a path to the time and sales machine after every open and every close. I thought he was fastidious.
It's possible that was not the case. What I was observing, as I was told, was that he was matching completed orders up with prices. There’s nothing necessarily wrong with that. It’s just that the system was rife for abuse. The broker could easily give favorably priced trades to his best customers and poorly priced trades to his worst. This would all have to be matched up with the pit locals.
Lest you think I’m issuing an indictment, that’s not the case. I didn’t know how things played out between this broker and the pit locals. My sources may have been trying to hype a situation or had a beef against this broker. Maybe what I saw was just a part of normal daily activity.
I did write a series about broker groups when I was working for Dow Jones. As I got into that story, I heard plenty of complaints about some of the groups. These groups were powerful and controlled order flows across the floor. As a local, you had to play nice with the brokers in order to get any trades thrown your way.
The point of the podcast and of this blog is that there was ambiguity on the trading floor. I believe most people tried to do a good job. Certainly, brokers and phone clerks were aware of the need to promptly fill customer orders at the best price possible. It didn’t always happen. More often than not, it was hard to get a good fill in a busy market. Less frequently, someone might step in front of a big customer order.
I heard rumors about whether organized crime had a presence on the floor. I can’t say whether they did in a trading capacity. It’s likely, however, that they had their fingers into the bookmaking operations. Given how much money was bet on sporting events on the floor, the likelihood is strong that someone, somewhere was paying street taxes.
Drug use was also said to be widespread. That was all supplied via some form of organized crime delivery. I never saw that on the floor. I was told that had moved into the upstairs offices.
Were the trading floors citadels of honest and fair trade? Mostly, yes. Completely, no. Greed and related temptations were always close at hand on the floors.
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This blog is about more than my experiences. It is intended to be a collective experience of working on the commodity markets physical trading floor. If you or someone you know has a story please let me know I’d like to include it in this ongoing chronicle. I can be reached at linton122@gmail.com
© Clifton Linton 2023