So, in the movie, as far as I can tell, Dan and Eddie didn’t just fuck over the Duke Brothers…they fucked over a lot of people! Everyone following the Dukes seem to have lost out to some degree.
Now…here’s where my knowledge of 80’s stock brokering falls short…the people losing money I’m guessing, are big firms.
BUT if this happened today? It would be a lot more than big firms. A lot of mom and pops with online access would lose their shirts. If this happened today?
The only people who made money were those that were awake, paying attention and walked with their profits IN BETWEEN periods where orange futures got halted for raising too fast or for the announcement.
OR people who shorted and went to sleep and forgot to set some kind of stop order.
And boy did they wake up to a rollercoaster. Also, I dont think the Dukes would end up living in a ditch as seen in Coming to America.
Finally, how would the Duke Brothers going bankrupt affect everyone who had an account (??) with them?
Please feel free to correct me where i’m wrong here.
So…if i follow…then the people hurt in 1983 were pretty much only big firms?
Which leads to the question…do Robinhood and Charles Schwab and other brokers for small ‘mom and pop’ accounts not give their clients access to the futures market?
In a nutshell: I’m trying to find out what the unseen effect of Dan and Eddies move was in 1983
…AND what would the damage be to others besides the Duke brothers if this occurred in 2020?
The futures market is far more volatile than stocks, so the people in it are prepared for sudden losses. Small investors don’t trade in it, nor does anyone who has a low tolerance of risk.
Brokers may allow small clients to trade in it if they insist, but go all out to discourage it.
I don’t things have changed in that respect since the movie came out.
One side note; what Winthorpe and Valentine did in the movie (trading on non-public information) was not illegal at the time but since has been made illegal. And I think the movie was referenced when the law was changed.
The Duke Brothers were paying to get an early report on FCOJ crop projections, which is insider trading (knowledge of the USDA forecast before public disclosure). Louis and Billy Ray swapped the real report with a fake one indicating a lower than normal yield which caused the Dukes to spend their entire net worth to acquire futures on margin (since orange crop yields would be very valuable); in reality, futures weren’t worth that much, and Louis and Billy Ray shorted (hedged against future value), which allowed them to “buy low and sell high” on the futures that they shorted from everyone except the Dukes, who were left holding futures contracts that were far less than the value they paid for them. When the Dukes were required to show their collateral for their futures contract (a proverbial “margin call”) they were short, which resulted in their being bankrupt, while Louis and Billy Ray sod back their shorts at a significant profit.
Who lost money in this transaction? Obviously the Dukes lost everything, and people who blindly followed their speculation probably lost a lot (though those that sold quickly lost less). Frankly, the movie has a lot to say about the dangers of wanton market speculation and influence of very wealthy investment interests even before Oliver Stone’s Wall Street, and in many ways presages the mortgage industry inflationary crisis in creating a market where appearance is taken at more value than the actual reality, since the forecast for orange yields should have been available to anyone who actually understood agriculture long before the USDA report was issued.
It should be noted that the premise of the film was (very loosely) modeled on the Hunt Brothers attempt to corner the silver market (“Silver Thursday” of 1980), although the Hunts were ultimately bailed out, because of course they were, and commodities market speculation continued but eventually became concentrated in real estate and mortgage speculation. So it goes.
I think this stuff’s fascinating but it does make my head spin.
So, again correct me if i’m wrong:
At $142, Winthorpe basically says, “Hey, gimme $142 and I’ll give you a share tomorrow (I don’t know what exact date he said, so we’ll say tomorrow).” So of course everyone says “Fuck yeahhhhh its gonna be worth more than that tomorrow!!”
So, as I understand it, everyone who did that is fucked right? They can’t sell their Winthorpe shares can they? They don’t have them yet. Best they can do is short shares as the market plunges and in 1983 with a rapidly closing market that probably doesn’t have very good response time, how effective is that going to be?
Everyone who shorted orange juice at 9AM, and somehow had the balls to hold through to the EOD bell…can use their newfound riches to replace all those pants that got shit in.
I wondered about this for a long time as well. Here’s an explanation.
Usually its buy low, sell high to make a profit. This was sell high, buy low…they didn’t own the thing they were selling yet, but were promising to get it for a certain price ($1.42/lb) by a certain date (April).
Aykroyd mentioned the “short” in one interview.
Quoting: There are a number of ways of achieving a short position. The most fundamental method is so-called “physical” short-selling, which involves borrowing assets (often securities such as shares or bonds) and selling them. The investor will later purchase the same number of the same type of securities in order to return them to the lender. Buying high and selling low bankrupted them. And as the prices plummet Aykroyd and Murphy buy (now) low-priced FCOJ to satisfy the ale they’d made earlier at top price, realizing a fortune.
Stock broker dopers, do I finally understand that correctly?
Sounds good to me! Of course once the price tanked they were able to “buy it back” easily.
But I think something else had to happen that we don’t see. IIRC the butler and the prostitute each give them envelopes of money with their life savings just before they go in for the big trading scene. But why? Did they have to put up collateral or something to guarantee their trade or set a credit limit or what?
I think Ophelia said earlier in the film that she had $40,000 in T-bills, so presumably she cashed those in and that was the amount she handed over. Coleman handed over a slightly thicker bundle, so perhaps $60,000, or $100,000 in total. But they also had the money the Dukes gave to Beeks (or who they thought was Beeks) in the parking garage. We weren’t told how much that was, but it was the stereotypical “briefcase full of money”, which could be a million dollars. So they had a fairly substantial amount in collateral. Enough to make all of those short contracts? I don’t know.
Where do they take that money (and other collateral)? If they were going to a casino, I know there would be cages who sell you chips. At a stock exchange who accepts the collateral? And how do other traders know how much credit they have?
Collateral, in the case of margin calls, is general other equities and investments held on one or the other big boards.
Say you have $100,000 and it’s all margined. That means you’ve got $50,000 worth of loans against it and the law says you can only borrow 50% of what your actual holding are. Fine.
Say your investment of $100,000 drops to $75,000. Suddenly your $50K loan is 66% of your holdings. If your margin is called you are given the option of paying down the margin call until you’re again at 50% debt-to-equity OR you can purchase more shares to get yourself back to $100,000.
I know a builder in Ohio who was hammered by this in 2008/2009. He was financing his construction work on margin and was hit four or five times in two months with significant margin calls that made him toss tens of thousands into his account to maintain his value. Risky, risky stuff. I only have one client who I allow to have margin on his account.
Most retail brokers - Schwab, Jones et al - that market to the mom and pops of the world either don’t allow for margin, commodities or futures investing at all. The risk - of client’s loss OR a firm’s compliance obligations - just make it not worth doing. They can - I do for some clients - but I generally try to discourage them. There’s significant - even unlimited in a few cases - risk of loss.
Those who lost in Trading Places would almost certainly have been large, institutional investors or private equities firms with specialized knowledge of the orange and affiliated markets. There might have been some individual investors involved, sure. But they’d have been what are called ‘qualified investors’ or ‘accredited investors’ (or the 1983 equivalent as I don’t know when the terms first got defined). Such people are considered to know the ins-and-outs of investing and presumably understand the risks inherent in their trading behavior.
It makes a huge amount of sense that Joe Blow can’t just walk in and start trading so I totally get the need for collateral aspect. But to whom did they hand the cash?
And of course some suspension of disbelief is required for movies to work…but they’ve got this cash money that could be from drug transactions. That was alleged to get Aykroyd kicked out in the first place, and the prostitute’s money IS from illicit activity so…? The stock exchange just accepts stacks of money as collateral?
OK it’s a device for movies but really: who takes the assets when they’re wired in or whatever? Some sort of escrow account?
Aykroyd (Louis) was once a Duke and Duke employee. I guess the accusations against him didn’t cost him the right to trade?
Then, once they get into those pits it’s incredible chaos. I could see a fixed minimum I guess—if you don’t have X on account with us you’re not invited. Maybe that explains why they can bid so high without checking each other’s credit?
And how do they track who bought what and at what cost? I thought they wrote it on paper but you see a lot of paper on the floor at the end. Do they never renege on a deal?
This is a bit of simplifying on the filmmakers part. The call the brothers got required them to pay for what they’d committed. If they couldn’t - or in this case if it made their margin account exceed 50% of their assets under management one of two things would happen. First - and most likely - whichever broker-dealer (Merrill, Goldman, Jones, Ameriprise, whatever) held their assets would seize or sell those assets until it got back to 50% margin to asset. Second, the brothers could give their B/D cash to purchase new equities to get themselves back to 50%.
I can’t speak to 1983 compliance regulations so understand that. But right now I’m required to report any cash transaction that seems in any way suspicious even if all I have is ‘a feeling’. My job is to report that feeling up the line and let someone more qualified investigate.
Generally (now) a B/D will not accept cash. If they’re affiliated with a bank - Merrill and Bank of America are essentially one firm now - they an investor can deposit with BoA and transfer the funds to a brokerage account at Merrill. Trust me, they’re glad to make that happen.
For my part, we’re not affiliated with a bank. I’m not allowed to accept cash for deposit at all. Only checks and transfers. No credit cards, either, for reasons which should be fairly obvious (I hope). Someone giving me - or attempting to give me - cash is prima facie evidence that I should report up the chain. There are other suspicious activities that can cause a report as well.
As stated above, the B/D who held the margin account would do the transaction either selling out some of the brother’s assets or accepting a check or MO to bring the account back within margin balance.
This is another thing that the movie fudged. No one person has the right to trade on the exchanges. Only reqistered B/Ds do. My licenses (I have a few and am working on some others) are my own. I studied for them and am responsible for maintaining them. But they’re only active through a B/D. When I was switching firms a while back - I had cancer and dropped out of the business to recover - the minute I left my earlier B/D my ability to trade was cancelled. When I felt better and went back to work, my new B/D had to reactivate my license. It took a day or two as I recall. Prior to that I could listen to people about their financial situation and needs but I couldn’t give any advice nor push the button that made trades happen.
Another example of this. My assistant was a financial advisor and her license has not expired - we have to renew every three years with traininig - but because she’s my assistant she can’t give advice or push the button. Should she wish to do so she’d have to alert by B/D and we’d shift her payroll number to a producer and get her licenses turned back on.
Bear in mind this was 1983(?). Instantly checking net worth and credit wasn’t a thing easily done. Anyone registered to trade on the floor (a company, not an individual, remember) would have had to submit financial reports every some-period-of-time to maintain standing.
What happens in the movie? Where some dude comes up to them and says, “pay up or lose your seat”? That’s fiction. It speeds up a process that would have taken a week or a month to go through.
OK, I want you to internalize the difference between a pre-computer age and now. Back then each time there was a trade - those assholes running around screaming - there would be two records on it on those bits of paper, one for the buyer and one for the seller. At the end of the trading day accountants and other people much more detail-oriented than I am would go through all of those slips and match each to the other and sort out who had what. God, what a piece of shit job that must have been.
So, in essence, another fiction is that the exchange would have instantly known how underwater the brothers were right at close-of-market.
Now, another thing. Those guys running around screaming? That’s all bullshit now. For as long as I’ve been in the business (ten years, nearly) we do it all with technology. I live near Charleston, SC and I can trade on all the big boards with my tablet in my briefcase and do it easier and more accurately than those guys. I want a stock - as an example - and I go look it up and see what the asking price is and decide whether it’s worth it. If it is I push the button and the system goes out and, for example, if I said I wanted 1000 shares of XYZ and $10/share goes out and finds someone who wants to sell 1000 shares of XYZ and will accept $10/share. It can be a bit more complicated than that in some cases but that’s most of what goes on.
