They stole it from the Duke brothers’ operative, Mr. Meeks. Then they gave the Duke brothers a fake report at a meeting in a dark parking lot where they could not be recognized.
I still don’t understand the chronology of what happened. I thought someone said that they had to begin by buying, since they didn’t have any futures to sell, and then immediately sold what they bought. But then someone else contradicted this. Would someone be so kind as to make a numbered list of what they did in order from the time the opening bell rang, through the crop report, to the closing bell? I will be indebted to you, and will repay you whenever you need a modal tableau constructed for your argument in Great Debates. Thanks!
For what it might be worth, when Valentine and Winthorpe began buying at the opening bell, the price almost immediately began going lower. (From 142.) This alarmed the Duke brothers. Randolph Duke exclaimed, “The price is going down. That’s not right!” They then tried to rush down onto the floor (when the price hit about 130) to get their man to sell. What did the lowering of the price tell them? Was it something Valentine and Winthorpe were doing?
It’s been a while since I saw the movie, but the way I remember it is this:
They started selling commodities they didn’t have (selling short as per jjimm’s link), knowing that the price would go down. These commodities were essentially borrowed from somebody. This is quite possible to do in the real world and is often done. Through selling they accumulated a large amount of money.
The price went down, and they used the large amount of money to buy commodities so that they could return the borrowed commodities. The rest of the money was profit.
What would have happened if the price had gone up instead? They would have been up Shit Creek without a paddle, canoe or ability to swim. To put it in other words, completely broke and in debt.
While selling short is legal, using insider information (as they do in the film) is illegal, and if it had come out they would have gone to jail.
Yes. Since Valentine and Winthorpe were selling large amounts, the price went down through the laws of supply and demand.
Are you sure this is the way it happened, though? Since the Duke brothers were relying on false information they believed the price would be going up as soon as the crop report hit, so the price going down should lead them to buy instead of sell. As you tell it, it makes little sense.
Except that they saw Valentine and Winthorpe selling, which aroused suspicion in them, and they soon understood what the two were up to. Ignore this part.
Oh, bing! So, you return the borrowed commodities, and whatever value they have when you return them is irrelevant — they’re still the same entities. It’s like borrowing a hammer when you know a hurricane is approaching and then returning it after the wind has died down. It was worth a lot more when you were putting up plywood, but so what — you borrowed a hammer, you’re returning a hammer, and your intact windows are your reward. I think I get it now. (Correct me if I’m wrong.)
I’ve never heard it put like that, but yeah, that’s about the size of it. You do have to pay some kind of interest or fee to the entity that borrowed you the commodities, though, so I guess it’s more like renting a hammer before a hurricane.
You’re not buying or selling commodities in the futures market. You are buying or selling financial contracts involving the commodoties. There’s no borrowing the commodities. One can hardly put OJ in their trading account to cover contracts, which is unlike selling stocks short where you could put the actual stock in your account to cover the transaction.
Futures contracts are not meant (usually) to be fulfilled by the transfer of the actual commodoty and rarely are. The trading is a financial matter invovling speculation or hedging of price.
It seems two different operations are described here. In both case you sell something you don’t currently own but :
-In the first case, you borrow something intangible (a stock) sell it at price X, and latter buy the stocks to gave them back to whomever you borrowed it from, hopefully at a lower price Y. You pocket the difference.
-In the second case, you only promise to sell something tangible (cocoa, for instance) at a future date for a fixed price X. Between now and the date agreed upon, you buy the cocoa on the market hopefully at a lower price Y. You pocket the difference.
Of course, it involves serious risks, since likely, you don’t have the money needed to buy the stocks/ products at the first place. You rely on the prices falling in the future so that the amount of money you’re getting now will be more than what you will need later to buy the stocks/product and fulfill your obligations towards the lender/buyer.
I know of someone who went totally broke over such a deal. He lost not only his shirt, but all his property, including his house (it’s not possible for an individual to fill bankruptcy in France) and even then he still owed so much that he’ ll have to pay a fixed amount (something like 2/3 of his income, IIRC. He’s now a retiree) to his creditors each month until his death. And it still won’t cover all his debts. By the way, he had pulled a similar trick a decade or so ago, with a similar though less disastrous result, and supposedly couldn’t operate on whatever market he was operating on anymore, but found some way around. A situation which probably didn’t help him much when he had to deal with his second failure.
This guy was sort of addicted to “betting” on the markets and couldn’t help himself, it seems.
To complete the picture, his wife divorced him too. With good reasons, since she had been worried by and opposed to his operations, and wasn’t aware he was still doing it after the first disaster. She managed to get out of the debt hook personnally (but only after all they owned had ben sold, hence she had to financially begin her life again from scratch at 45).
Thanks!