# Trading Places (Anyone here stock savvy?) **URL:** \ **Category:** Cafe Society\ **Created:** [April 17, 2020, 7:58pm UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005 "2020-04-17T19:58:56Z")\ **Posts on this page:** 16\ **Page:** 3
**Author:** ![Elendil\_s\_Heir](https://avatars.discourse-cdn.com/v4/letter/e/7cd45c/32.png) [@Elendil\_s\_Heir](https://boards.straightdope.com/u/Elendil_s_Heir)\ **Post date:** [April 22, 2020, 8:48pm UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/41 "2020-04-22T20:48:13Z")
Previous threads on this topic: > **[Trading Places: please explain the commodities trading scene at end](https://boards.straightdope.com/sdmb/showthread.php?t=590704)** > > Trading Places is one of my all-time favorite movies. Love every single part of it. “The best way to hurt rich people is by turning them into poor people.” “Eggnog, anyone?” Anyways… the scene at the end where Winthorp and Billy Ray do the thing... > **[A question about the commodities scene in TRADING PLACES](https://boards.straightdope.com/sdmb/showthread.php?t=488429)** > > If you’re familiar with the movie then you know the one I’m talking about: Winthorpe and Valentine (Akroyd and Murphy) bankrupt the Duke Brothers (Ameche and Bellamy) while making millions by using and falsifying insider information about the Frozen... > **[Wall streeters...explain what happens in Trading Places](https://boards.straightdope.com/sdmb/showthread.php?t=174138)** > > I know a lot but I unfortunatly cant keep up with what exactly occurs when Ackroyd and Murphy buy up the orange juice concentrate shares. Just explain the whole line. How did they bankrupt the Brothers and make money doing it? I know the report... > **[Stock market question: selling before buying](https://boards.straightdope.com/sdmb/showthread.php?t=282488)** > > 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 ... ---
**Author:** ![Dale\_Sams](https://avatars.discourse-cdn.com/v4/letter/d/779978/32.png) [@Dale\_Sams](https://boards.straightdope.com/u/Dale_Sams)\ **Post date:** [April 22, 2020, 9:05pm UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/42 "2020-04-22T21:05:52Z")
By the way, i want to point out that short selling in a Black Swan event like these days is beyond nerve wracking. I don’t recommend it. Learn from my mistake. At first its a good idea, but eventually the market will move from: “Fuck I need money!/ a billion stop losses were triggered” to “This stock will go up someday, fuck the underlying principals, I’m committing and walking away” Watching a stock you’ve shorted go up with no ceiling is unbearable. ---
**Author:** ![Dewey\_Finn](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dewey_finn/32/4222_2.png) [@Dewey\_Finn](https://boards.straightdope.com/u/Dewey_Finn)\ **Post date:** [April 22, 2020, 9:25pm UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/43 "2020-04-22T21:25:38Z")
First, if you like the financial trading aspects of the story, I highly recommend the Showtime drama series Billions, which begins its fourth season in a couple of weeks. It’s a drama and not a comedy but it is compelling. One of the characters owns a hedge fund so some of the action is set amongst the traders. Second, one of **Elendil’s Heir** ’s links to earlier threads about the movie included a link to this [Planet Money story](https://www.npr.org/sections/money/2013/07/19/201430727/what-actually-happens-at-the-end-of-trading-places) that explains, in broad terms, what happened at the end of the movie. Another [Planet Money page](https://www.npr.org/sections/money/2013/07/24/205167911/guy-who-wrote-trading-places-responds-to-our-show-about-his-movie) has a response from the screenwriter. And [this page](https://www.businessinsider.com/an-oral-history-of-trading-places-2013-6) from Business Insider is an oral history of the movie. It changed the careers of some of the creators and actors (including Don Ameche, whose had not worked in Hollywood in fourteen years, but had quite a few roles after this one, including in Cocoon, for which he won an Oscar). ---
**Author:** ![Jonathan\_Chance](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/jonathan_chance/32/701_2.png) [@Jonathan\_Chance](https://boards.straightdope.com/u/Jonathan_Chance)\ **Post date:** [April 23, 2020, 2:27am UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/44 "2020-04-23T02:27:26Z")
> [@Dale\_Sams](#): > > Watching a stock you’ve shorted go up with no ceiling is unbearable. You’re a madman. You were doing that? ---
**Author:** ![Riemann](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/riemann/32/3133_2.png) [@Riemann](https://boards.straightdope.com/u/Riemann)\ **Post date:** [April 23, 2020, 3:23am UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/45 "2020-04-23T03:23:22Z")
> [@Dale\_Sams](#): > > I was going to say play oil company stocks\* but those have seemingly decoupled from oil or common sense or reality. Yes, I know about the May oil futures and what happened. I’m only 50 miles from Cushing if anyone wants to store their barrels in my backyard. > > - Oh look…Devon and Apache are green today, Makes total sense! > > But seriously…if everything doesn’t completely fucking collapse…they should be ok eventually. But as an aside - don’t go near funds like USO that get their exposure from futures. There has apparently been heavy retail buying as it has collapsed, and I think 90% of people who are buying it don’t understand what they own, and think it’s a play on long term recovery in the price of oil. ---
**Author:** ![squeegee](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/squeegee/32/14537_2.png) [@squeegee](https://boards.straightdope.com/u/squeegee)\ **Post date:** [April 23, 2020, 3:30am UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/46 "2020-04-23T03:30:42Z")
> [@Omar\_Little](#): > > Uh, yeah…the OP made that reference for the rest of us. :rolleyes: Right, because everyone remembers _that specific joke_ from a 32 year old movie. How stupid of me not to realize. ---
**Author:** ![Dale\_Sams](https://avatars.discourse-cdn.com/v4/letter/d/779978/32.png) [@Dale\_Sams](https://boards.straightdope.com/u/Dale_Sams)\ **Post date:** [April 23, 2020, 5:55am UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/47 "2020-04-23T05:55:12Z")
> [@Riemann](#): > > But as an aside - don’t go near funds like USO that get their exposure from futures. There has apparently been heavy retail buying as it has collapsed, and I think 90% of people who are buying it don’t understand what they own, and think it’s a play on long term recovery in the price of oil. Oh look Riemann has a ‘bug’ in my room because that was the other side of my EFF up this week. USO is at a low. I’m going to take a chance it will bounce. Ok, the bad news has hit and it didn’t fall. I’ll hold over night. Wake up to a 33% loss. Ok, oil sucks, we all saw it coming. I’ll short oil company stocks then, look oil is going lower AND THESE OIL STOCKS ARE GOING HIGHER AND HIGHER POHIOOHFHIOPDHIOPHSHIO#%$$$ Sorry I had to vent. ---
**Author:** ![Dale\_Sams](https://avatars.discourse-cdn.com/v4/letter/d/779978/32.png) [@Dale\_Sams](https://boards.straightdope.com/u/Dale_Sams)\ **Post date:** [April 23, 2020, 6:00am UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/48 "2020-04-23T06:00:30Z")
> [@Jonathan\_Chance](#): > > You’re a madman. You were doing that? Bunch of stupid mistakes, panics and rationalizations. Lesson learned. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [April 23, 2020, 2:23pm UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/49 "2020-04-23T14:23:54Z")
> [@Dewey\_Finn](#): > > First, if you like the financial trading aspects of the story, I highly recommend the Showtime drama series Billions, which begins its fourth season in a couple of weeks. It’s a drama and not a comedy but it is compelling. One of the characters owns a hedge fund so some of the action is set amongst the traders. > > Second, one of **Elendil’s Heir** ’s links to earlier threads about the movie included a link to this [Planet Money story](https://www.npr.org/sections/money/2013/07/19/201430727/what-actually-happens-at-the-end-of-trading-places) that explains, in broad terms, what happened at the end of the movie. Another [Planet Money page](https://www.npr.org/sections/money/2013/07/24/205167911/guy-who-wrote-trading-places-responds-to-our-show-about-his-movie) has a response from the screenwriter. And [this page](https://www.businessinsider.com/an-oral-history-of-trading-places-2013-6) from Business Insider is an oral history of the movie. It changed the careers of some of the creators and actors (including Don Ameche, whose had not worked in Hollywood in fourteen years, but had quite a few roles after this one, including in Cocoon, for which he won an Oscar). Nitpick, but this isn’t correct from bullet point 5 at the bottom of the first link: > [@Planet Money](#): > > In other words, Winthorpe and Valentine have contracts allowing them to buy millions of pounds of orange juice in April for 29 cents a pound, and to sell it for $1.42 a pound. They initiated a short position at $1.42 and then covered the short when they bought at $0.29. They’re flat and have no position at the end. > [@Riemann](#): > > But as an aside - don’t go near funds like USO that get their exposure from futures. There has apparently been heavy retail buying as it has collapsed, and I think 90% of people who are buying it don’t understand what they own, and think it’s a play on long term recovery in the price of oil. I’m a pretty Caveat Emptor kinda guy, but I think the regulators have really dropped the ball on some of these products - USO, VXX, etc. The overwhelming majority of retail (and some institutional!) traders don’t understand what they’re buying. At minimum, brokers should require clients to jump through the same hoops required to directly trade the underlying - risk disclosures, etc. Putting a portfolio of oil futures in an ETF wrapper and listing them on a different exchange doesn’t change the risk profile. > [@Dale Sams](#): > > Watching a stock you’ve shorted go up with no ceiling is unbearable. Given that that they’ve decided to allow negative prices in the oil futures market, now there’s also no floor there. Bizarre. ---
**Author:** ![Tired\_and\_Cranky](https://avatars.discourse-cdn.com/v4/letter/t/a87d85/32.png) [@Tired\_and\_Cranky](https://boards.straightdope.com/u/Tired_and_Cranky)\ **Post date:** [April 23, 2020, 10:02pm UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/50 "2020-04-23T22:02:23Z")
Boy, is there a lot of misunderstanding in this thread. For what my opinion is worth, **Trom** has a lot of good information although he didn’t say as much as some others. > [@Dale\_Sams](#): > > 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. This is about commodity futures, not stocks, and understanding the differences is critical. > [@](#): > > 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? IMHO, probably not, because mom and pop might trade stocks (or equity mutual funds) but not commodities. > [@](#): > > Finally, how would the Duke Brothers going bankrupt affect everyone who had an account (??) with them? I don’t remember the film that well but the activities depicted in the as I remember it concerned proprietary trading - that is, the Duke Brothers were trading their own money, not customers’ funds. It’s not clear to me that they had customers. If they were acting as Futures Commission Merchants for customers, their customers should be fine even if the Duke Brothers went bankrupt. The Duke Brothers’ funds and assets should be segregated from their customers’s funds and assets. If the Duke Brothers had losses greater than their capital, their customers would not pay for those losses. > [@Dale\_Sams](#): > > So…if i follow…then the people hurt in 1983 were pretty much only big firms? Pretty much. > [@](#): > > 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? Generally, no. > [@Dewey\_Finn](#): > > 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. This is true. Insider trading in the futures market wasn’t illegal until 2010, and no one was prosecuted for it until 2015. [The First Insider Trader in Commodities](https://corpgov.law.harvard.edu/2015/12/04/the-first-insider-trader-in-commodities/) > [@Dale\_Sams](#): > > 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? There’s so much to correct here, it’s hard to know where to start. At $1.42, the contract value is the quoted price times the size of the contract. So, at $1.42, if the contract is 15,000 lbs, the value of the contract is $22,300. Futures contracts are for future delivery, There is a futures contract for each month for each commodity. The Dukes were going long, so they were buying contracts. Essentially, they were saying, “I’ll give you money today for the right to get 15,000 lbs of orange juice at the contract expiration.” Their counterparties are thinking either, “I have 15,000 pounds of orange juice, and I’d be happy to sell it for $1.42 per pound,” or “I’ll probably be able to buy orange juice for less than $1.42 per pound sometime before I have to deliver it.” The first group are mostly orange growers and the second group are speculators. Both are important participants (in different forms) in all the commodity markets. > [@lobotomyboy63](#): > > 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? I don’t have a perfect answer to this but money laundering regulations have been getting tighter and tighter since the 1980s war on drugs. This movie took place at the beginning of the 1980s. The simple answer is that they probably brought the cash to a bank, deposited it, and nobody asked too many questions. You are right that it wouldn’t work this way today. > [@Jonathan\_Chance](#): > > Collateral, in the case of margin calls, is general other equities and investments held on one or the other big boards. Collateral is held by the person who is lending you money or a third-party trusted by the person lending you money (such as a custodian bank or a prime broker). The “big board” refers to a stock exchange, which is the market where your stock might trade, but it is neither lending you money, nor holding collateral. This movie took place on a futures market (formally, a “Designated Contract Market.”) > [@Jonathan\_Chance](#): > > 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](https://www.fool.com/investing/2018/02/14/what-is-a-qualified-investor.aspx)’ or ‘[accredited investors](https://www.investopedia.com/terms/a/accreditedinvestor.asp)’ (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. Every futures contract is a zero sum game. Every dollar that someone makes in the market is taken from someone else who lost a dollar on the other side of that same trade. Stocks, for what it’s worth, are not a zero sum game. We know the Duke Brothers in the movie lost hundreds of millions of dollars. We know that Winston and Valentine made lots of money. The remainder of the Dukes’ money went to all of the other participants in the market. There isn’t really much in the movie (that I recall) suggesting that anyone else lost any real amount of money. On balance, every penny the Dukes lost was made by someone else. > [@lobotomyboy63](#): > > 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? It wasn’t hard to put even large amounts of cash in a bank back then because anti-money laundering regulations were considerably looser. They probably just deposited it in a bank and wrote a check. Alternatively, they just gave it to the Futures Commission Merchant they were trading through, and that firm just deposited it into the bank. > [@](#): > > Aykroyd (Louis) was once a Duke and Duke employee. I guess the accusations against him didn’t cost him the right to trade? A conviction for a felony might have cost him his right to trade but so far as I remember, he wasn’t convicted of a felony, so no. > [@](#): > > 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? Traders do have position limits based on the amount of their capital but that isn’t particularly clearly depicted in the movie. But one thing to recognize is that our heroes, if I remember right, were basically trading on the right side of the market. As they were making money, the capital in their account was rising, and they could afford to take bigger bets. > [@](#): > > 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? The floor brokers are shockingly good at keeping track of their money. It looks like chaos to us but the pros on the floor handle this remarkably well. It is unseemly to renege on a deal and it rarely happens. When in good faith two parties disagree about the terms of a trade, one party will “DK” (short for “don’t know”) the trade and it will be broken, but this is rare. If the amount of money at issue were big enough, the aggrieved party can follow the trading venue’s dispute resolution procedure to try to get the trade enforced but, in truth, the real way this is handled is that people stop trading with the person who keeps trying to break unprofitable trades, he can’t do any deals anymore, and he gets fired because he is useless. And if you bust one trade in bad faith with one person, no one on the floor who heard about it will trade with you anymore. > [@Jonathan\_Chance](#): > > 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%. The initial margin limit for stocks is 50% but it isn’t for futures contracts. The margin for futures contracts is sometimes as little as 3%, and is usually less than 25% of the contract value (see this list from the CME for current maintenance margin requirements: [https://www.cmegroup.com/clearing/margins/outright-vol-scans.html?redirect=/clearing/margins/#sortField=exchange&sortAsc=true&pageNumber=1](https://www.cmegroup.com/clearing/margins/outright-vol-scans.html?redirect=/clearing/margins/#sortField=exchange&sortAsc=true&pageNumber=1)). Sometimes, when the markets are very volatile (like now), margin requirements are higher and a retail customer’s required capital to trade commodities might be much more than 100%. This is actually happening in oil right now. If an ordinary investor wants to buy $1 million in oil futures, he probably has to post $2 million in capital because the FCM will demand the extra capital. Also, the entities you cite are primarily stock brokers. Goldman Sachs does have a substantial Futures Commission Merchant business, however. > [@](#): > > 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. I’m glad you recuperated from your cancer and best wishes on your continued good health. This is all correct for trading on stock exchanges. It’s amazing how few people in the industry understand this. And not just any registered B/D can trade on an exchange; the B/D must be a member of the exchange. Most B/Ds aren’t members of any exchange. > [@](#): > > 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. They wouldn’t lose their seat that quickly, but they could lose their ability to trade on the market by the end of the day. That’s close enough to accurate for me. > [@](#): > > 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. But everyone on the floor was watching them amass a huge long position that went bust. It’s true that the market wouldn’t have known just how under water they were but it wouldn’t have been a secret that they would have been badly hurt and probably bust. Again, for the sake of storytelling, it’s good enough that they could know right away. > [@lobotomyboy63](#): > > My question was more about Louis/Billy Ray: they’re known because they represented the Dukes. But they’re off on their own here. This is their money, so their credit (not the Dukes’) is at issue. Of course they could have saved up but they’re pretty small potatoes…? They did have to rely on their own money but they rounded up a decent stake to start trading and they had inside information that allowed them to trade on the right side, so they were building up more capital as they were trading. It takes money to make money, and as they made money, they had more money with which to make even more money. They were also employing as much leverage as was available to them, which could have been as much as 20x or 33x. > [@](#): > > Lots of money launderers would like to show up at the stock market with stacks of cash, I imagine. They weren’t trading on a stock market, and markets don’t take your money. For stocks, a broker-dealer will hold your money and let you trade with it. In commodities, that role is served by a Futures Commission Merchant. Back then, financial firms weren’t so picky about who they took money from. And Winthorpe likely had contacts at other firms who could make this go smoothly. > [@](#): > > The big, powerful Duke Brothers have one guy in that pit. These guys (without a company?) are both in the pit. Dramatic license again? Yeah, it’s dramatic license but, to put a charitable spin on it, they could have associated with another member of the market and been allowed to trade on the floor. Both of them recently worked for the Duke Brothers and presumably had licenses that could have been transferred to another firm lickety-split. Of course, I don’t remember any of that being shown in the movie. I also don’t remember seeing anyone poop, and I am okay with both omissions. > [@](#): > > I did think it was interesting that they knew how many millions the Dukes owed. 7 jillion transactions being screamed across the floor…someone higher up is tallying as we go? With today’s technology, yes…but back then? The precision is just a storytelling shortcut but they would have been watching the trading closely and they might have had a pretty good idea how much the Dukes lost. Again, floor traders are pretty good at counting their money. > [@](#): > > If I understood it right, they sold at 1.42, then bought at less. The final price listed was .29 and that represents the lowest price paid, right? So as the price fell they bought at some amount between the two, like .55 or .67? If they bought at .29, they’d get almost 5x their investment but if they spent more, it would have been a less dramatic amount. Compared to what the Duke Brothers lost, though ?😕 But they could have been using a high degree of leverage. Perhaps 5x to 33x leverage. They could have with good trades turned a small fortune into a huge one, just as depicted. > [@Jonathan\_Chance](#): > > Especially since - an unmentioned part - what they did is so illegal everyone involved should be in jail. The Duke boys technically didn’t break the law at that point. However, criminal conspiracy to defraud an entire exchange? That’s worth some time in the hoosegow right there. Valentine and Ophelia might not have known it but I guarantee you Winthorpe knew it. There was no “defrauding” the market. There is in fact, in the U.S., no accepted “fraud on the market” theory of insider trading. The market isn’t a party to any of the transactions. They can commit fraud against a person (and I’m simplifying greatly here) only if they misrepresent information to a person or they owe that person a duty to disclose information to them and they don’t disclose it. Winthorpe and Valentine didn’t defraud any of the participants in the market that I can recall, with the arguable exception of the Duke Brothers, to whom they orchestrated the delivery of a falsified Agriculture report. (Open question is whether Winthorpe and Valentine could be said to have made any misrepresentation given that their role wasn’t even known to the people relying on the report, or whether they had any duty to ensure that a report that the Duke Brothers were trying to obtain illegally made it to the Duke Brothers unimpeded. These are not easy legal questions). The Duke Brothers were guilty of bribing a public official to get the report. They should go to jail for that. > [@](#): > > Absolutely. Neither of them should be there. Winthorpe is an executive trader. He’s not licensed for that and shouldn’t know how to do it unless he started there. As stated up there, he should be calling one of those guys who’s employed by whatever B/D brought them on board to make those moves. I don’t know what an “executive trader” is. They were presumably trading through a Futures Commission Merchant. Introducing Brokers also execute futures trades for customers, which they run through a Futures Commission Merchant but, since the action here is all taking place on the floor of a futures market, we know they were trading through a Futures Commission Merchant that was a member of the market. It’s true that there are separate National Futures Association licenses for “Associated Persons” (who are basically the people who work in an office) and floor traders ([Registration and Membership | NFA](https://www.nfa.futures.org/registration-membership/index.html)), but this is a pretty small bit of artistic license to use in the movie. > [@](#): > > Yeah…no. No way it happens that quickly. Even today most stock trades settle in two days. Used to be three two years ago - I think, I forget the exact time of the change - and decades ago it was 10 or 14 days. Now for options it’s usually next day close-of-business but there are exceptions. > > Now, in terms of getting all that tallied? Even today with modern technology things get out of balance and trades that were executed can’t be reconciled and some equities are put on hold until things can be sorted out. I wasn’t active way back when - I was 16 in 1983 - but I can’t imagine it was anything but orders of magnitude worse then. It’s was harder to do then but firms both then and now have a continuous obligation to monitor and maintain their minimum net capital requirements, even intra-day. The Dukes were under water when their trading went south, not when they later had to satisfy all those trades at settlement. > [@](#): > > As I said up there, the most they could have made was about half-a-million dollars in profit. But the Duke boys could have lost far more. If nothing else, because others would have taken then bet against the Duke boys - players much larger than Ackroyd/Murphy - and would have stood to make far more money. > > Imagine: the MOST the Duke boys could have lost per contract was $1.42. So if they’re truly wealthy then they could have sold a million contracts and lost a maximum of $1.42MM. If they had 10 million contracts they could lose $14.2MM. That’s a big chunk of change - about $36MM in adjusted dollars - but I can’t imagine it would bankrupt the Duke boys. > > But, as I said above, movie’s gotta movie. Remember, futures are a zero sum game. Whatever the Dukes lost was the money everyone else made at their expense. And their positions were implied to be heavily leveraged, which means they stood to potentially lose a lot more than 100% of their invested capital. There was plenty of opportunity for Valentine and Winthorpe to make tons in short order. Assume they scraped together $100,000. They deposit it with a firm and they are allowed to leverage that by 20x, so they can take positions up to $2 million. In the morning, as the Dukes are buying, they go long, and earn 50%. So, they now have gains of $1 million, and capital of $1.1 million. They can now margin to $22 million in contracts. So they do it again. They go long and gain another 50%. They now have another gain of $11 million and capital of $12.1 million. They can now buy contracts worth $242.2 million. And this is all before lunch! On the basis of that capital, they can basically do the same thing on the way down, increasing their capital by a factor of ten each time. Of course, at some point, they run out of counterparties to take money from, so it doesn’t really work that way forever. But in the movie, they were the smart money who took all the capital from the dumb money Duke Brothers. Everyone else in the movie were just noise traders. Some made some money, and some lost some money, but Valentine, Winthorpe, and the Duke Brothers were the market movers, and the money basically flowed between them. > [@Jonathan\_Chance](#): > > Well, there would be some fees from the exchange. And the B/D they’re (not) with (apparently) would want it’s cut of the take. So there’s that. Figure they lose about 20-30% of the take in fees. Could be much worse or better depending on what Winthorpe negotiated. The market would charge fees. They would also pay transaction fees to their futures commission merchant, but those fees are pretty small, Think on the order of a fraction of 1% of the contract value. When the market moves are doubling your price every hour or two, the brokerage fees are inconsequential. (In the real world, those brokerage fees add up when the real moves in commodity markets are more likely to be less than 1% per day, and when the market is exactly as likely to move against you as it is to move in your favor). FCMs can’t take a portion of their clients wins or losses. It is prohibited by law. It’s somewhat unclear the exact capacity that Winthorpe and Valentine are trading in. They are trading on the floor, which not just any schmo is allowed to do. That suggests they are trading in an official capacity as a floor trader for the FCM. If they are associated persons/floor traders for the FCM, they aren’t customers. As a floor trader, their arrangement could be to keep only a portion of their trading profits from the account (with the rest going to the FCM), but, in that case, it’s also quite possible that they got some additional capital from the FCM with which to trade. > [@](#): > > OK, so theoretically the Dukes boys lost $1.13 per contract max. If they owed $394MM then they’d purchased 346,672,566 contracts out there from our heroes or others who didn’t follow the pack. > > But it’s a margin call. So if they owe that much - unless that represents there entire investable assets - they have significant other assets elsewhere. I can’t believe writing futures like that would bankrupt them. Leverage. Lots of it. The Duke Brothers say they are committing all their capital. It’s plausible enough for a movie that their leveraged position lost more than they had in capital at their firm and their losses were large enough to wipe out their outside assets too. ---
**Author:** ![Riemann](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/riemann/32/3133_2.png) [@Riemann](https://boards.straightdope.com/u/Riemann)\ **Post date:** [April 23, 2020, 10:22pm UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/51 "2020-04-23T22:22:46Z")
The situation with USO seems to be deteriorating, even though there was a modest rally today. For reasons that aren’t really clear, they have suspended the process by which creation units can be exchanged for new shares. In other words, there is no mechanism to arbitrage any difference between the USO price and the value of its underlying portfolio. So it’s now like a closed end fund that can trade at a large premium or discount to it’s net asset value. In the short term, this may cause a short squeeze and paradoxically cause USO to trade at a significant premium so long as there is net retail demand. But it’s not a good thing, because retail buyers who already don’t understand that they are effectively buying short term futures contracts and paying the huge contango to roll them out, may now be buying short term futures contracts at a significant premium. A premium that could collapse at any time. The other issue that I haven’t seen addressed is that the potential for futures contracts to go negative has to mean that USO could get a margin call that it simply can’t meet. This will not end well, I think USO could implode completely. Don’t touch it with a bargepole. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [April 24, 2020, 7:05pm UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/52 "2020-04-24T19:05:21Z")
> [@Riemann](#): > > The situation with USO seems to be deteriorating, even though there was a modest rally today. For reasons that aren’t really clear, they have suspended the process by which creation units can be exchanged for new shares. In other words, there is no mechanism to arbitrage any difference between the USO price and the value of its underlying portfolio. So it’s now like a closed end fund that can trade at a large premium or discount to it’s net asset value. > > In the short term, this may cause a short squeeze and paradoxically cause USO to trade at a significant premium so long as there is net retail demand. But it’s not a good thing, because retail buyers who already don’t understand that they are effectively buying short term futures contracts and paying the huge contango to roll them out, may now be buying short term futures contracts at a significant premium. A premium that could collapse at any time. > > The other issue that I haven’t seen addressed is that the potential for futures contracts to go negative has to mean that USO could get a margin call that it simply can’t meet. > > This will not end well, I think USO could implode completely. Don’t touch it with a bargepole. USO is trading at a premium to its net asset value right now because the “authorized participants” that normally keep it in line with the futures are unable to execute the arbitrage. See [here](https://www.etf.com/etf-education-center/etf-basics/what-is-the-creationredemption-mechanism?nopaging=1) for a description of how ETFs are created and redeemed to keep the markets trading at fair value. USO had to halt the creation of new shares because they’ve issued all the shares they had legally registered. In order to issue more, they have to submit a filing to the SEC and wait for approval. They have already submitted the [filing](https://www.sec.gov/Archives/edgar/data/1327068/000117120020000251/i20250_uso-s3.htm), and are waiting for it to be declare effective by the SEC. Once the additional 4 billion shares are registered, arbitrageurs will buy the underlying futures, deliver them to the USO fund managers in exchange for shares, and sell the newly created shares into the market. Through that process, USO’s price will return to where it “should” be. I agree negative futures prices have tremendous consequences for the USO fund custodian. In theory, the custodian would be liable for losses if the futures contracts it holds were to go negative. USO used to have 80% of its assets in the nearest dated future (now June), and 20% of its assets in the second month contract (July). After the May futures went negative on Monday, USO actually moved their allocation to 40% June, 55% July, 5% August. Again, speaking of ignorant retail traders, not only does USO not represent exposure to the price of oil as seen on TV, it doesn’t even offer the same exposure to the market it did a week ago! ---
**Author:** ![Dewey\_Finn](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dewey_finn/32/4222_2.png) [@Dewey\_Finn](https://boards.straightdope.com/u/Dewey_Finn)\ **Post date:** [April 28, 2020, 1:00pm UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/54 "2020-04-28T13:00:22Z")
Reported. ---
**Author:** ![lobotomyboy63](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/lobotomyboy63/32/2900_2.png) [@lobotomyboy63](https://boards.straightdope.com/u/lobotomyboy63)\ **Post date:** [April 28, 2020, 1:11pm UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/55 "2020-04-28T13:11:55Z")
Thanks for the reply, Tired and Cranky. It’s amazing to me that they could track it all that quickly, in real time. ---
**Author:** ![Dale\_Sams](https://avatars.discourse-cdn.com/v4/letter/d/779978/32.png) [@Dale\_Sams](https://boards.straightdope.com/u/Dale_Sams)\ **Post date:** [April 29, 2020, 5:35am UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/56 "2020-04-29T05:35:11Z")
Thanks Tired and Cranky, that was fascinating. ---
**Author:** ![Dewey\_Finn](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dewey_finn/32/4222_2.png) [@Dewey\_Finn](https://boards.straightdope.com/u/Dewey_Finn)\ **Post date:** [April 29, 2020, 10:08pm UTC](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005/58 "2020-04-29T22:08:34Z")
Reported [Previous page](https://boards.straightdope.com/t/trading-places-anyone-here-stock-savvy/852005.md?page=2)