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 was faked but I am slightly confused.
Someone will explain this and I will smack my head going of course, of course.:smack:
First, read Larry Mudd’s link about short selling. It’s basically normal trading done in reverse: instead of buy low, sell high, it’s sell high, buy low. It sounds strange at first, but it works. It’s done when you expect prices to drop instead of rise.
The Duke’s fake report leads them to believe that the price of orange juice will go up after the Secretary of Agriculture gives his announcement, so they instruct their man to buy as many shares as he can no matter what.
Ackroyd & Murphy, having seen the real report, know the price will actually go down after the announcement, so they begin short selling, which is selling shares they don’t have yet, with an obligation to buy them back later at a (hopefully) lower price.
When the other brokers see the Duke guy buying like crazy, they assume the Dukes have inside information and they begin a buying frenzy as well. A&M, meanwhile, are short-selling shares to everyone who wants to buy. This means that as the price of OJ goes up, A&M are raking in lots of cash, but are also racking up a potential debt (buying back the shares they short-sold) that will be impossible to pay off if the price of OJ stays high.
When the Sec’y of Agriculture starts his speech and trading pauses, the price of OJ is sky-high, the Dukes hold a huge number of shares worth millions, and A&M hold a huge number of ‘negative’ shares, plus a lot of cash (on paper, anyway, no actual cash changes hands on the trading floor). If trading were to end at this point, the Dukes would be rich (well, richer) and A&M would be absolutely ruined.
The Sec’y gives his announcement, revealing that the orange harvest was good, and there will be no shortage of orange juice. This means that the current price is vastly over-inflated and everyone begins frantically selling their shares. Now A&M begin phase 2.
They begin buying everyone else’s shares, cancelling out the obligations they incurred from their earlier short-selling. Because they are (presumably) buying back shares at a lower price than they sold them for earlier, they turn an overall profit.
The Duke trader, on the other hand, is in a panic because his bosses haven’t given him new orders to stop buying. He freezes up, does nothing, and finishes the trading session still holding all the shares he bought at the over-inflated price.
When trading ends, the price of OJ is much lower than it was earlier in the day, and A&M have made an enormous profit. The Dukes, however, are left holding a huge number of purchase orders that are now almost worthless. They’ve lost a huge amount of money.
As for the bankruptcy: after the end of trading, the head of the exchange then announces a “margin call”. When you buy shares on margin, you’re borrowing money in order to buy more shares than you have available cash for. SEC rules (I believe) state that the amount you owe must be no more than a certain percentage of your total invested assets. If, because of a drop in stock prices, the value of your invested assets becomes too low, the exchange will announce a margin call, insisting that you cough up the dough to bring things back into balance, and that you do it now. In this case, the Dukes borrowed everything they could, thinking they were making a sure bet. When the OJ price collapsed, the amount they had to pay back to cover their margin debts was more than had, and they were bankrupted. Had they done all their trading in cash, not borrowing anything, they still would have lost most of the money they invested, but that would have been all that they lost. They’d still have their mansion, their trading firm, and their seats on the exchange.
One problem with scheme (for both A&M and the Dukes) is the fake report, which is little more than a summary of crop predictions for the coming season. Weather patterns and farm outputs aren’t exactly Code Red Super-Duper State Secrets, so the Secretary of Agricuture’s announcement shouldn’t be doing anything but confirming what hundreds of analysts (including the Dukes’, you would think) have already figured out from their own research. The Dukes should have been extremely suspicious of the fake report (“I don’t remember Florida being encased in a glacier for three months”), and even if A&M hadn’t pulled the switch, getting the real one in advance shouldn’t have given the Dukes much, if any, of an advantage.
Rather than frenzied trading coming to a screeching halt as everyone gathers around the TV to hear to the report, it would probably just be background noise on an ordinary trading day.
I asked a similar question a while back on this board. I understood why the Dukes were bankrupted (as said above, they failed to meet a margin call), but not how V & W made a fortune (again, as said above, they sold short).
In addition to the points sublight already made, in real life, the board would have been shut down at the first sign that the Dukes were going to corner the market, and I believe that concentrated orange juice is traded in Chicago, not New York.
Concentrated orange juice is not sold anywhere, but the main commidities exchange is in Chicago. I don’t think the Dukes ‘cornering the market’ would have shut trading in Conc. OJ futures down. I don’t know rules in place on that date, but there are some stops currently in place to protect against wild price swings.
Let me throw in some numbers to Sublight’s on-the-money margin explanation:
You are able to margin 50% of the cost of a security (including Conc. OJ futures).
You put up $100, and are able to buy $200 worth of securities.
As long as the securities are valued at $200+, your loan is not called.
Once the securities dip below $200, you have to keep your loan percentage at 50%. If the securities are worth $190, you can only have $95 on loan, and must pay back $5.
If the securities are at $50, you can only have $25 on loan, and must pay back $75.
Add six zeroes to all the numbers and the Dukes are broke.
Governor Quinn, look at Akyroyd & Murphy’s selling short in this way:
Before the Secretary of Ag’s announcement, A&M were selling short at inflated prices – that is, selling shares they did not yet own. So, just to pull some numbers out of the air, assume they sold 100,000 shares at $20 each. At this point they now have $2,000,000, but are also obligated to come up those shares. After the announcement, A&M begin to buy back (actual) shares at prices that are falling quickly. So they buy 100,000 shares at (let’s say) $5 each, costing them $500,000.
At this point, they have made $1,500,000 profit ($2 million - $500,000), and have the 10,000 shares that they had already sold.
Multiply these numbers by whatever the prices were in the film, and you can see how they made out with many millions.
Futures trader here.
First off, FCOJ is traded in NY not Chicago. The margin numbers that D_Odds provide have nothing to do with futures - those are for equities. The margin on futures is closer to 5%.
I don’t remember the specifics of the movie but if it was a crop report on OJ it could have had a huge impact on prices.
Here might be typical scenario, incredibly oversimplified:
OJ is trading at $100. The real report would indicate that OJ should be trading at $90. A&M make up a fake report that would have the Duke brothers believe that OJ will be trading at $110 when it is announced. They begin buying. Others see they are buying and figure the Dukes know something so join in. Meanwhile A&M are the ones selling them these contracts. So as the price goes up to 110, A&M have shorted all these contracts at an average price of 105 or so. The report comes out. People now see that the OJ crop is fine and that the price should be at $90 dollars so they sell what they bought in a panic. A&M cover their shorts on the way down and buy all their contracts back at an avg price of $95. So A&M have made an avg of $10 per contract.
Very interesting guys and well explained. I thank you as I never knew of the art of trading futures, yet still do it to some degree in my portfolio.
Has there ever been a real life big company such as the fictional Duke and Duke that have wound up in a windfall such as this (like a ruinous day of trading of some product?) where the margin call torpedoed them?
I find the futures market fascinating I guess 
This is one of my favorite movies, with some great lines (“They’re very musical people.”) But while the explanation makes sense for what should have happened in that scene, I seem to remember that the price started coming down as soon as A & M started buying, well before the crop report. I think the sequence was: open, price rising, other traders notice Dukes buying up, A & M start selling at the highest price, price immediately starts falling, Dukes realizing something wrong, crop report announced, price falling rapidly, A & M buying back at low price. Am I remembering this scene incorrectly?
KidCharlemagne, you nailed it right - I deal far more with equities than futures. I also thought FCOJ was a fictional commidity created for the movie. A quick search proves that I was wrong. I’ll head back to what I know and be glad that this is ‘General Questions’. KC, be proud. You’ve fought ignorance this day and won.
Gilligan, Long Term Capital Management is one firm that suffered greatly from too much leverage (buying on margin). There have been other less celebrated cases. More recently, a $300 million Japanese hedge fund, Eifuku, was forced to close.
Sorry, the previous post should have been addressed to TigoleBitties
Barings bank IIRC, went bankrupt because a rouge derivatives trader was temporarily hiding millions in losses in a secret account until he could make the money back trading. Unfortuately, the Tokyo earthquake crashed the market and whoops! Barings went bust.
They made that guy out to be some big swinging speculator when he was really just a broker committing outright fraud.
BTW I have traded FCOJ a few times though it’s far too illiquid for anything i’d be doing now. I remember FCOJ was my very second trade when I was still in high school. Margin back then for one contract was $400. I bought it on the close. Overnight there was a crop freeze scare in florida and the front month (which is what I owned) opened up $4500 higher. Now if that doesn’t get you hooked, what will? The back contracts were locked limit up for 7 days.
It has been suggested at some places (such as www.imdb.com) that the Duke brothers are based on the Hunt brothers (Nelson Bunker and Lamar, I believe) who, around 1979-1980, attemped the corner the silver market and failed. Unlike the Dukes, however, they only used personal funds, and weren’t forced into bankruptcy.
That’s the one. I’m sure they thought he WAS a BSD up until the point where they found out what he was really doing.
There’s actually a movie about it from the UK. It’s called “Rouge Trader” and stars Ewan McGregor of Blackhawk Down and Trainspotting fame (not the Ewan McGregor who was in Moulin Rouge and Star Wars).
That’s funny:D
Actually those are the same Ewan McGregors. You know I didn’t even really i was making a funny re: “illiquid.” Thanks for pointing that out
I may the one being whooshed, but I think msmisth537 was making a critical comment of Mr. McGregor’s work.