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Onions and Eggs
on January 19, 2011
"The Futures" is delivered as a flat midwestern yarn -- as if told by a Chi-town native, holding forth on a barstool over beers. (PBR of course.)
The story begins with Chicago's founding in the early 1800s. We find out how the futures business, originally built around grains, was a byproduct of Chicago weather: When the canal and river froze, farmers were forced to store their crops, thus creating gluts in the spring -- and the need to lock in sale prices in advance. By the mid-1860s, the first prototype of the U.S. futures contract had arrived.
There is a saying, "I went to a fight the other day and wound up trading futures in Chicago." The history, and the business itself, is built around colorful characters with descriptive nicknames like "Old Hutch," "Vince the Prince," and "Harry the Hat."
In further example, when one well-liked floor trader expired in the pit, the others kept on trading around him... and later expressed the opinion that "that's the way go."
To be clear, Lambert's book is not a primer on trading. Instead it is a series of narratives, tracing the beginnings of futures trading (and the Chicago exchanges themselves) to the present day.
Having cut my teeth as a commodity broker in the late 1990s, "The Futures" brought back memories. (There is nothing quite like arguing at the top of your lungs with a runner named Sol about a bad fill in the S&P pit, with three phone lines lighting up and the market moving away from your partially executed order.)
One of the characters Lambert touches on is Ray E. Friedman, the founder of REFCO (the firm that cleared our accounts). It turns out old Ray had done a prison stretch for selling grade B chickens as grade A to the army in the Korean War. His corner-cutting habit must have infiltrated the culture of the business. REFCO, after growing to $4 billion in customer assets, collapsed in a fraud scandal in 2005.
"The Futures" is also largely the story of onions and eggs -- the original commodities of the "Merc" or Chicago Mercantile Exchange. Lambert recounts how the CBOT was predominantly Irish and the CME Jewish: If your last name was Murray you were Board of Trade, but if your first name was Murray you went to the Merc. The onion trade was eventually banned by congressional order (at the request of angry onion farmers), while the egg trade revolved around the "butter and egg men" of Fulton Street.
Unlike onions, the egg trade was done in by modernization: Eventually chickens were laying eggs year round, which took the seasonality out. But by the time eggs went away, the bigger businesses -- currencies, indices and interest rates -- were just getting going.
There is very much a "right place, right time" aspect to the later explosive growth of the exchanges. Interest rate futures came into their own as the Volcker Fed wrestled with inflation in the early 1980s, causing bond prices to fluctuate wildly. Currency futures had started in time to take full advantage of the post-Bretton Woods era. And the big daddy of them all, stock index futures, got rolling with the help of a tax advantage at the start of the long-running bull market.
By the close of the story, the color and the craziness is clearly fading, the pushers and shovers in brightly colored jackets being replaced by the quiet hum of computers. Gone are the days of frantic hand signals, spontaneous fist fights, and drug-using clerks wearing goggles to protect their eyes against paper cuts. As Chicago modernized itself, going from stockyards to towers of steel and glass, so too did the futures industry. The new era is electronic, and global.
That makes it all the more fun, though, to revisit this fast, amusing tale of how the exchanges grew up with the Windy City, and the gritty roots of how it all came about.