Benefits to Trade

What’s your favorite business movie?

Fair Use. Source: Wikipedia

One of the best is “Trading Places,” a modern take on Mark Twain’s Prince and the Pauper starring Dan Ackroyd and Eddie Murphy. It tells the story of a privileged commodities broker and a homeless street hustler who are thrown together when they are made the unwitting subjects of an elaborate bet. Apart from a minor role by now-Senator Al Franken, it also includes a fairly accurate description of the commodities business, with scenes from the open-outcry pits at the New York Mercantile Exchange, formerly located in the World Trade Center.

The Nymex floor used to house precious metals, cotton and sugar, petroleum futures, and – the subject of this movie – frozen concentrated orange juice. Contrary to the story, “FCOJ” was never a major contract. That would have been gold and crude oil. But the movie’s plot-line – involving secret crop reports, the US Department of Agriculture, and circus animals – made for some entertaining scenes, including ones with the Minnesota Senator.

The open outcry system isn’t around anymore. Most futures pits closed in 2015 – a result of computerized screen-trading. Electronic systems were faster and less expensive. They started replacing the open outcry system in the early 00’s. Options trading, which is more complex, still took place in the commodities pits, but that was replaced by automated exchanges late last year. The main reason big stock exchanges still have physical trading floors now is marketing – offering listing firms (and others) an opportunity to “ring the bell” to begin trading on a special day. Open outcry trading now serves mainly as a backup for when computer systems go down.

Source: CME, WSJ

Commodities used to be the other side of the tracks – where someone with ambition and hustle could make it without having to go to college. They also provided a great backdrop for a funny movie. Now, graduate degrees in math, physics, or computer science seem to be necessary. The quantitative, scientific approach to trading has reduced costs and increased market efficiency. But I wonder what we have lost?

Douglas R. Tengdin, CFA

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