Trading Places: please explain the commodities trading scene at end

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 in the commodities market with the orange juice [I guess there might be spoilers here for the one person who hasn’t seen this 1983 movie…]- can someone explain to me step-by-step and syllable-by-syllable exactly what happens there?

Spoilers might follow.

I gather the FALSE OJ report says the crop has been damaged so there will be a shortage of OJ in the coming year.

So the Dukes tell their guy to buy, buy, buy all of the OJ options/futures (what is the correct term), because then they will own all of the OJ. Am I right so far?

Then Winthorp and Billy Ray go down to the trading floor, and this is where I don’t understand any more… they start buying, too, to drive the price up even higher? The price starts out at 120.

So they’re buying and buying, and so is the Dukes’ man. And the price is going up and up. I think it tops out at over 200.

Then the real crop report is broadcast. Now everyone knows that there will be NO shortage of OJ, so the thing that was worth 200 isn’t any more? Why? Why does the value of the thing drop precipitously?

And what, exactly, do Winthorp and Billy Ray do at this point… everyone wants to sell their OJ and Winthorp and Billy Ray start buying… why do they do this?

When all’s said and done, the price is something like 30 and the Dukes are broke. Why?

Pretend you’re explaining to a four-year old. Thank you.

You have the sequence more or less correct, and it makes no real-world sense. It bears no relation to actual financial markets.

You have it reversed. IIRC, the guys do a bunch of short selling. They let the Dukes agent bid up the price, and sell a bunch of futures at the newly inflated price. Futures they don’t really have. they bought them on margin with the money they borrowed from the butler and the hooker. Then, when the crop report is read and the price plummets, they wait until it gets to panic time and buy a ton of futures, covering what they sold. By the end they had 1) bought X number of futures at 35 +/-, 2) sold X number of futures at 126 +/-, therefore 3) Profit! They also shafted the Dukes in the process, who were stuck in the exact opposite position.

This. They sold first, then bought. The Dukes bought first, then sold in a panic.

And they were all buying on margin. That’s the point of the scene with the Dukes. “Margin call gentlemen.”

Let’s ignore some of the mechanics and say that the movie events are possible in a movie sort of way.

A forward is a contract for delivery of a certain product at a certain time for a certain price. So you and I could contract for me to sell to you 1 ton of coal on July 2nd, 2011 for 72 dolars.

A futures market is a collection of standardized forward contracts that provide a liquid market for commodities - they allow people to buy and sell securities on an exchange. There price is determined by the price of the underlying commodity - they are therefore what is known as a derivative security. Whereas a forward contract will often anticipate delivery, futures will settle on the market. That means that I will never actually deliver you the coal that the security represents. Instead, we will simply look at the agreed upon price (say, the 72 from above) and compare it to the current spot market when July 2nd rolls around. If, for example, the coal was trading for 75 dollars on that day when our trade expires, then I would have to pay you 3 dollars. That way, you can go to the spot market and buy your coal with 72 dollars of your own money and three dollars of mine. And I can go sell my coal on the spot market for 75, but then I have to give three to you. See, we’ve entered into a hedging contract that has locked our price at 72 dollars, reagrdless of the market movements, by the use of a financial instrument. Although, there is no need to actually negage in the physical trade - it’s fairly common for one party to be hedging (a bread manufacturer hedging against fluctuations in the wheat market), while another is simply speculating (someone at a bank).

btw, the person selling the future doesn’t need to actually have access to the commodity, since it’s a purely financial deal - in some ways it’s similar to a naked short sale on a stock, but it really is better to just think of it as totally different (the similarity is that you have to buy to close the position, but you have to sell to close a position on a futures purchases, so…)

So, when you buy and sell futures, you are ultimately betting on how the commodity will perform from now until the expiration of the contract (of course, you can settle the contract prior to expiration by entering into an offsetting deal - and, honestly, nobody holds to expiration - almost everything gets closed prior). It’s this bet on the future that drives the idea behind Trading Places.

From the explanation above, we (hopefully) can see that if the price of the spot market for OJ goes up over the next 6 months, then anyone who buys futures today will make a lot of money. Conversely, anyone who sells OJ now would lose money.

The false report was (when interpretted as accurate or real) kind of like inside information. Like if you knew that Google was about to buy company xyz, so you start buying a ton of stock in the company, thinking that it’s price would soar once the general public found out (which is illegal, btw). Anyway, if you did that - and you did it enough that you drove up the price - and kept buying at the higher price, thinking that it was still cheaper it would be once the news got out - and then it turned out that Google wasn’t buying it and the price plummetted back down - well, you would be screwed.

That’s what the movie was trying to illustrate.

Except in this, everyone knows that the crop report is about to come out. When the 'big’players start buying and buying right before it comes out, people think that they are on to something - so a bunch of them play along and everyone buys.

When the real report comes out - everyone who was buying realises that they just made some really bad bets - so they all rush to try to get out of their positions and it sends the price of the futures crashing.

Now, the whole time, Winthorp and Billie were actually selling futures - so now they start buying them back (for much cheaper than what they sold) in order to close their position and reap their profits.

The reason that the report would have such an effect is because OJ, like anything else, is priced on supply and demand - so a bad report means that you would have low supply in the future (and therefore a high price). A normal report means that that prices should be, well, normal. It’s those prices that will drive the spot market in the future, and it’s the current expectations of future spot market pricing that drives the current pricing of the futures markets.

Hope that helps.

A previous thread, with links to two others: http://boards.straightdope.com/sdmb/showthread.php?t=488429

Thank you, everyone, Darth Panda & Elendil’s Heir (for the links) especially! I’m SO glad others have asked this question in the past, and boy, has it ever been explained thoroughly! I’ve loved this movie since it came out in 1983 and I’ve watched it dozens of times and finally I get this part. :slight_smile:

Anyone want to guess at how much Valentine and Winthrop made at the end? My guess was several hundred million.

Enough to buy a GI Joe with the Kung Fu grip I’m sure.

I’ve always wondered about this scene too. But my other question is, how in the world did/do they keep track of all the guys shoving papers in their faces? Surely, they can’t acknowledge each and every person trying to trade with them? How did that work in the real world? Everyone just shoving paper into everyone’s face. How would you know if they accepted/declined your order or if you got to everyone in time? How does THAT part work?

Louis: Looking good, Billy Ray!
Billy Ray: Feeling good, Louis!

A wizard did it.

“It was the Dukes! It was the Dukes!”

Yep, they do keep track of each trade. It’s organized chaos. Even with all of the apparent confusion, floor trading is a remarkably efficient way to trade. When there is a dispute about who traded with who, at what price, or how much it is referred to as an “out trade.” After the market closes all trades are “cleared” and accounts are settled. If necessary an exchange official/governing body will make a ruling on out trades. Here’s a video of the soybean pit at the Chicago Board of Trade from a few years ago:

http://www.youtube.com/watch?v=XZEBz01t5vg&feature=related

If you don’t want to watch the whole thing, fast forward to ~2:00 where it really heats up. After the bell (~3:13) you can here traders squaring up whatever trades they might have missed - “Who sold me 5 at 7?” etc.

I’m taking this zombie out for a stroll because I stumbled on the definitive, short, step by step answer to my question. It’s very clearly worded so that even I understood.

Also, I figure some of y’all will be watching this Christmas movie in the near future, and if you really grasp the details of the explanation, you can dazzle all your friends.

Thanks for posting that link. ThelmaLou. My eyes have been opened!

Agreed! I also had remembered reading what they did was technically not illegal. It was good to learn that was fixed.

I opened a thread about short selling a few years ago too. For the average person whose idea of investing is a 401k, it can be confusing at first. That’s why it’s strange that so many big movies aimed at general audiences use it as a key plot point. It’s impossible to understand the plot of Casino Royale without knowing about it too.

As an aside, I remember visiting the stock exchange with a friend in New York, and watching from a viewing area. Other than Eddie Murphy’s acting, it reminding me quite a bit of the exchange in the movie. Organized chaos. I was suitably impressed.

I’m mostly unclear on how Winthorp and Valentine got on the trading floor in the first place.