A Market Vignette

In the absence of anything interesting to say about a drearily dull start to the week, Macro Man thought he would share a small vignette of what the market was like two decades ago.

Macro Man's very first job upon graduation from university was in Chicago, working for a very well-known option market-making firm.  Having acquired an interest in foreign exchange while studying abroad during the '92 ERM crisis, he was assigned to work at the currency options pit of the Chicago Mercantile Exchange as a trading assistant.

Before arriving in Chicago in July of 1993, he wasn't really sure what to expect.  Having attended a liberal arts university, he had taken no finance courses; as such, the only options knowledge he possessed was what he'd crammed for the interview to get the job in the first place.

From what he could tell, however, it was pretty complicated stuff.  The firm he was joining had a reputation for being staffed with really smart people (naturally- they'd hired Macro Man!), so he assumed that the business generally was populated by the types of guys who broke the bell curve in collegiate math courses.  After all, the chaps on TV who talked about the stock market all sounded pretty clever, and anyone who'd read Liars Poker knew that they were bottom of the intellectual heap, right?

The job, as it was explained to Macro Man during the offer, was to assist the firm's option traders in the CME pits while slowly acquiring sufficient practical and classroom knowledge to eventually become a trader himself.  All in all, it promised to be intellectually stimulating while serving up the odd jolt of adrenaline when things got a little crazy.

Upon starting the job, your author found that (unsurprisingly, in retrospect) the quotidian aspects of the job were somewhat more mundane than anticipated.  Perhaps he should have been warned when he found that all the traders referred to his yellow-coated brethren as mere "clerks" rather than the more elevated "trading assistants," though given that most of his early-career tasks were indeed clerical, the shoe fit (and he wore it.)

What was really shocking, however, is when he actually went to the exchange floor to work during trading hours.  The roar of the floor, particularly during a data release, was startling but hardly surprising.   No,what really opened his eyes was the people.

Contrary to expectation, the floor was not primarily populated calculus curve-breakers.   Oh sure, some of the options guys were really smart, both in an academic and street sense.  The futures traders and brokers, on the other hand, while hard workers and good at their jobs, were more notable for the size of their beer guts than their IQs.   These were salt-of-the-earth guys, many of whom might be digging ditches if they weren't on the floor.

There is perhaps no other job in the world where flatulence is as much of an asset as it is on an exchange floor.  Have you been squeezed out of a good location in the pit?  Drop a little "bomb" and the crowd will part like the Red Sea, allowing you to occupy your preferred spot.  Certain traders developed a knack for letting fly right before a large order came into the pit, thus ensuring that they could occupy the prime real estate in front of the broker and do a large portion of the trade.

In  Macro Man's second week of work, the senior trader he was clerking for got into a fistfight with a rival trader.   This was not a typical baseball fight with lots of milling around and little actual violence; this was a proper punch up.   Macro Man happened to be on the edge of the pit to pick up some trading cards from said trader (nicknamed 'Johnny Ya-ya') and saw the whole thing unfold before him.   He instinctively grabbed Ya-ya's opponent but was ordered instantly to let him go and leave the pit.

After the fracas broke up, Ya-ya stormed off of the trading floor.   With one brief exception a few months later, he never returned, having transitioned to an "upstairs" job trading OTC options.

One aspect of the floor that Macro Man remembers fondly was the prevalence of ridiculous bets.   Traders, clerks, and  brokers would have a flutter on everything, from the first day of snow (it was Halloween 1993, if memory serves) to the height of the trading floor (architectural plans were consulted) to who would win a fight between a killer whale and a great white shark (Macro Man rang the Chicago aquarium to get an expert answer on this one, perhaps inspiring this show.)

There were three bets, however, that still resonate with your author to this day.   The superstitious might even suggest that they offered foreshadowing of the financial crisis and its aftermath.

A foot of cockroaches.   There was a broker in the Deutsche mark option pit called Chris who was a bit different from a lot of the guys- he seemed older and he wore a pony tail, which wasn't a common barnet on the CME in the early 90's.  Oh, and he claimed he could eat a foot of cockroaches (i.e., twelve inches' worth of cockroaches laid end to end.)

Naturally, this inspired a modicum of skepticism from other denizens of the DEM pit, so a few friendly wagers were offered...and then a few more....and a few more.  Brokers bet with brokers, traders with traders, clerks with clerks.  Eventually, after work one day, the cockroaches were somehow procured, laid end to end.....and duly consumed.  Bettors on Chris were paid out, and Macro Man learned very early on that not only is there never only one cockroach, but that even the most foul of (financial) fare will usually find a consumer.

The NCAA tournament.  Betting on the NCAA college basketball tournament was rife, unsurprisingly.   Unlike the relative tedium of filling in brackets and tracking overall accuracy, NCAA betting CME-style was devastatingly simple.    The winner of the tourney was worth $100; everyone else was worth nothing.  Markets were made in each of the teams, and you were obligated to keep track of which teams you bought and sold, in which quantity, with whom, on the free trading cards that that were a staple of the CME.

This was all well and good, provided that one sized their positions correctly and managed risk.   In many ways, this sort of trading taught neophytes like your author as much about risk management as his professional activities, given that it was our own wealth on the line.  Unfortunately, not everyone learned his lesson.   A clerk for a rival trading company owned by a French bank fared rather poorly, losing some $15,000 in the process to all manner of floor personnel.  (Remember, this was more than two decades ago, so the sum was almost certainly in excess of half of his annual salary.)

This proved to be quite a thorny problem, as the kid couldn't pay, which irritated his creditors rather considerably.   Eventually, a compromise of sorts was reached:  the clerk was sacked and the bank made good on his debts to avoid the stigma of having stitched up the rest of the floor.   This was quite an early indoctrination into the concept of "if you lose enough money, eventually somebody will bail you out for 'the common good.'"

Fifty Reese's Cups.    On the wall of the exchange, surrounding every pit, there were rows of little boxes with phone turrets where clerks would accept orders from "upstairs" and signal them into the pit.   There was a guy who assisted one of these phone clerks who was big.  Not Big Ten football lineman big, Augustus Gloop big.   As memory serves, he took a bit of ribbing about his size, but was generally good-natured about it.

Somehow, one day the phone guys started talking about Reese's peanut butter cups, and how many one could eat at a single sitting.   One thing led to another, and the gauntlet was thrown down as to whether Augustus could eat 50 Reese's cups.   Call it a financial version of Cool Hand Luke.

As in the film, the entire proposition inspired a raft of betting, except in hundreds and thousands rather than twos and tens.   Consensus was probably tilted very slightly in Augustus's favour until someone thought to ask him if he liked Reese's cups.   "They're my favourite," he replied with a glint in his eye, thereby spurring a frenzy of betting on "Yes."

As with the cockroaches, the Reese's Bacchanalia was scheduled for after the close on some appointed day.   In the run-up to the eat-a-thon market anticipation built to a fever pitch, and even those benighted souls with nothing riding on it were eager to see if Augustus could emulate Paul Newman.

Alas, it was not to be.  On the morning of the appointed day, the news rippled through the trading floor: the bet was off.   Apparently Augustus, in a rare fit of concern over the state of his well-being, had taken the outlandish step of consulting a physician about the proceedings.   This worthy individual had warned him of the potentially disastrous consequences of scarfing that much candy in one sitting (presumably hyperglycemia.) 

The moral of the story, of course, is that it is possible to have too much of a good thing, even a favourite sweet.   Readers will no doubt have deduced by now where Macro Man stands on this issue vis-a-vis the raft of easing measures served up by Willy Wonka the Fed and BOE, among others.

'Tis a pity that the professors who run monetary policy these days never spent any time on the Merc floor.   Perhaps Chris, the wayward clerk, and Augustus could have taught them a thing or two...