I realize it’s just a movie, but in Trading Places, Billy Ray Valentine (Eddie Murphy) and Louis Winthorpe III (Dan Rather) go onto the floor to trade Orange Juice (futures, I guess). They begin by selling large quantities at high prices (starting at 142), and then when the news is announced (they already know) that the bad winter had no effect on the orange harvest, the bottom fell out, and they begin to buy large quantities (ending at 29). Obviously, they made a bundle. But my question is, how could they sell before they had any? IS that SOP for the NYSE? Or is the premise of the movie just full of crap?
I’m no expert, but I have friends who have worked in futures, and this is their explanation to me.
This is called selling short (or short selling). You enter into a contract to sell a vendor X number of orange futures at value $Y at some date in the future. There is no requirement for you actually to have possession at the point you offer them - merely to have them to sell at the date. You are banking on the price falling, so you make your purchase just before you have to sell them, at a price of $Y-Z. Your profit is therefore $XZ.
It’s a standard practice, without which nobody would ever use futures markets, since you’d only ever profit on price rises.
When you short something (eg a currency or stock), you borrow loads of it and sell it promptly. Or you borrow the money to buy it with, buy it. and sell it promptly. When it falls in value you buy it back, sell it, repay your creditors and pocket the difference. If it rises in value, you’re in trouble. In practice, you might just buy an option to sell (as jjimm mentions) but of course you still have an obligation to deliver. Retail stock investors (or ‘gamblers’ at least) can do this using warrants. Level-headed people will steer clear.
I got into commodities for about 6 months. With only $5000 invested I could gain or lose $1000 in a day easily. Did pretty well and had my account up to $7200 after only a few weeks. Then I got greedy and lost my shirt.
It’s not for the faint hearted.
You need to make clear in your mind one major distinction: There is a BIG difference between the stock market and futures markets. They are entirely different organizations, different processes, different rules.
Orange juice futures are NOT sold on the New York Stock Exchange. Shares of stock are NOT sold on the Chicago Board of Trade, the Mercantile Exchange, COMEX, or any of a dozen other futures markets.
On a stock exchange, you are buying outright shares of ownership of a large company. On a futures market, you are buying a contract to buy or sell a specified quantity of a specified commodity at a specified price at some future date.
So, the license taken was with the location? But essentially, what they were doing was standard fare, right?
(Incidentally, it was in fact Dan Ackroyd, and not Dan Rather, who played Louis Winthorpe III. I have no idea what I was thinking.)
I don’t think they had the location wrong. Wasn’t that done in Chicago. I have the movie, I’ll have to watch for that.
Anyway, I thought it was the Chicago Board of Trade. CBOT. I’ve been there, and it really is as crazy as it looks in the movie.
American, United and some other firms were massively shorted prior to the September 11 attacks. I assume the SEC also handles derivatives and that an investigation would have ensued but I never heard about their findings. Did this make news?
No, the location was correct. We saw them at the World Trade Center, where the Commodities Exchange was located. The NYSE is a few blocks away at Wall and Broad Streets.
As for this, both the Duke brothers and the Winthorpe/Valentine were engaging in insider trading. In the real world, there would have been an investigation, the profits forfeited and someone prosecuted.
On the other hand, they were in a tropical resort at the end. We can speculate that they were avoiding extradition in a foreign country (Cuba, perhaps?).
The closest thing to this IRL was the Hunt brothers’ attempt to corner the silver market, which collapsed in 1980.
Yes, I believe it was the WTC now that you mention it. So, what Valentine et al did was pool their resources (possibly borrowing some money as well) and then:
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Immediately bought as much as they could at opening bell.
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Sold it even as they were buying it until the crop report. (Maybe Winthorpe bought while Valentine sold.)
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After the crop report, bought all that they could until closing.
Is that right? If so…
Questions:
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What happened to what they bought?
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Did they have to buy the same quantity that they sold?
There really was no license taken. It was quite realistic. The only thing that would probably have happened differently would be that the market would have been limit up or limit down and therefore no trading could have taken place, but that wouldn’t have made for the mayhem.
It wouldn’t have happened as in the movie. Eddie and Dan didn’t have much in the way of equity. Each time the price rose, it meant their were deeper in the hole and real exchanges won’t allow that.
Also, by selling on rising prices, that puts a damper on the market–the movie seemed to express the idea that their actions increased the futures price. On the down side, their ever increasing purchases would have slowed the price decline as well.
I can’t remember the details but it wouldn’t make sense for them to have bought at the opening unless they were buying for the two old guys’ accounts. Akyrod and Murphy were selling futures short because they knew that the orange crops hadn’t frozen, knowing that when the report came out, the market would tank. If the crops had frozen, there would be less viable oranges and thus the price would go up. The liquidity for Murphy’s sales was soaked up by the Brothers’ buying based on the false report that the crops had frozen. Report comes out, crops are fine, market tanks. Murphy begins buying back at 70 what they sold at 100. (Making these numbers up), netting a profit of 30 ticks. Futures contracts don’t represent physical goods, just an obligation to buy or sell a certain quantity of a certain quality on a given date. In this case, 15k pounds of orange solids per contract. If I agree to sell an amount of orange juice to one person and buy the same amount from another person, then the clearing house will match up the the remaining buyers and sellers at settlement date. In the mean time, I’ve taken my money.
How do you know what their account equity was? Also, do you know how many contracts they shorted? Prices went up because word got out that the Brothers’ knew something so every piggybacked. Selling into rising prices doesn’t necessarily put a damper on buying if your just offering liquidity to buyers who are willing to pay just about anything. An auction is still an auction.
My futures broker friend told me that one day in 1991 he came into the office and the whole place was in chaos, with people dancing on the tables and cheering. Turns out they were celebrating the explosion of Mount Pinatubo in the Philippines, which had destroyed a large amount of the region’s copra, pushing the price through the roof. Never mind the 870 dead and 1,000,000 people made homeless.
Depressing, huh? My trading style was always contrarian so I was typically the one taking the other sides of these trades at the top/bottom so I never had to experience the guilt of profting off of others’ misfortunes. I guess you could say I was the “good” speculator. After I retired, I would dabble in trend-following once in a while and hopped on the long side of cocoa during the period of major unrest in the Ivory Coast about a year back (but not for those reasons). Every time tensions would rise, I’d make money and I hated the conflict of being happy I made money versus being sad that it was based on others’ misfortunes. I closed the position out and sent the profits to the Red Cross.
You are a good person.
An attempted market corner is somewhat different from what was depicted in the movie, which was an attempt to profit on advance knowledge of inside information. I’d suggest, as a closer parallel, the recent attempt to cash in, via the cattle futures market, on apparent advance knowledge that Mad Cow disease had reached the United States.
Note also, per the article,
In other words, the characters in the movie might not have done anything illegal. I don’t remember how they got the inside dope on the orange report.