2/ "Warm fronts from the south clashed with cold fronts from the north. As the seasons changed, temperatures swung from bitter cold winters to hot, humid summers. That's part of the funny story of this business and one reason why it developed in Chicago instead of, say, Florida."
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3/ "The river and canal were sometimes frozen, and merchants couldn't get corn to Chicago, so they stored it in corn cribs. In the spring, the river thawed and sellers converged on Chicago and drove prices down to the point that it wasn't always worth making the trip.
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4/ "Farmers, traders liked to say later with a theatrical flourish, would dump their corn in the river. "Merchants started arranging to sell in advance. On March 13, 1851, a seller promised to deliver corn the following June for 1¢/bushel less than the March price."
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5/ "Similar contracts were traded at other places and times. Some traders pointed to the Bible, ancient Greece, medieval Europe, and 17th-century Japan to show they were following an established path. But this trade took root in Chicago the way it hadn't before." (p. 5)
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6/ "Futures markets are the real free markets. Speculators serve a vital economic and social function given the right architecture. "The traditional futures market, because of its written and cultural limits, serves as useful example for how markets ought to work." (inside flap)
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7/ "They traded furiously because the demand for grain skyrocketed as northern and southern soldiers fought in the civil war. The Union quartermaster, who was responsible for keeping the troops fed, ordered oats and pork in advance, and speculators dove in." (p. 6)
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8/ "By 1865, contracts started to look alike. Instead of specific bags of grain, contracts called for standardized grades to be delivered in standardized amounts on standardized dates. It became easier to trade them like baseball cards.... the modern futures contract." (p. 6)
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9/ "Traders were more than gamblers: they bet on risks that [already existed]. The corn crop could fail. Farmers could be snowed in and unable to deliver. "So traders provided insurance: by locking in prices in advance, they took risks that other people didn't want." (p. 7)
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10/ Bhardwaj, Janardanan, and Geert Rouwenhorst look at futures contracts back to 1871. Consistent with Lambert, they find that contracts that may not have functioned well as insurance (extreme returns or easily substituted) were less likely to survive.https://twitter.com/ReformedTrader/status/1197401269821792256 …
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11/ "The more, the better. Whenever a farmer or merchant wanted to trade, someone was usually there to make a deal. As traders, they quoted competitive prices and created smaller gaps between buying and selling prices, shrinking what could be large swings in price." (p. 7)
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12/ "In a sense, everyone in Chicago was speculating. Hopeful businessmen constructed warehouses, railroads, homes, and shops. Some built stockyards on swampland. When cholera broke out, they raised the city streets and reversed the flow of the river." (p. 7)
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13/ "Some made money at the expense of farmers and merchants. They fixed prices. They had railroads deliver grain to them regardless of where it was supposed to go. Elevator owners spread rumors that grain was going bad so they could buy it. They bribed grain inspectors." (p. 9)
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14/ "Hutchinson and Leiter headed up a long line of people who tried to corner their way to riches and glory. The local papers gleefully reported on the many who failed. "Finally, the secretary of agriculture demanded that Board of Trade members oust the clique of
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15/ " 'gamblers and scalpers' in control of the exchange. And members in the 1920s had no choice but to adopt something they had previously resisted: a self-enforcement system called central clearing that became a foundational element of futures trading." (p. 13)
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16/ "The clearinghouse became an intermediary that guaranteed both sides of every trade. "Because the clearing firm was on the hook, it watched the trader. If he looked like a wild gambler, the clearing firm limited how much he could trade." (p. 14)
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17/ "It was important to learn to avoid the psychological traps that caught traders, like being too proud to admit a mistake. It was best to take a loss and move on. That was surprisingly hard to do. "A new trader had to learn not to talk about how much he had made or lost.
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18/ "To listen to what people said, nobody ever made a dime. There was a legitimate reason to keep quiet. A trader needed a poker face. When the bell rang, a he had no friends. If a man was in financial trouble and showed fear in his eyes, he was like a wounded antelope." (p. 20)
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19/ "Egg prices could change while eggs sat in storage. Eggs were seasonal: there were a lot of fresh eggs in the spring, the equivalent of harvest time, and there was a shortage in the winter. It was also difficult to predict how many eggs housewives would buy in any given week.
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20/ "Egg men on the street used futures like short-term insurance. A dealer sold a contract as a hedge if he thought prices might fall. That way, if the price of eggs dropped, he bought back the contract for a profit that canceled out what he had lost on the eggs." (p. 29)
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21/ "At the Board of Trade, it had become more difficult over the years for traders to corner a market. There was simply too much grain. It was still possible, though difficult, to squeeze the market by holding product off the market and buying futures to drive the price up.
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22/ "The traders most likely to pull it off were large grain firms. They had the best idea of supply, the money to buy a lot of grain, and the connections to disguise their purchases. A deep-pocketed trader who could buy grain and store it for years had a huge advantage.
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23/ "The Merc had smaller markets and perishable products. It was cheaper to try to corner. It was also easier to keep it secret. Because the products couldn't be stored, the trader didn't have to worry about people suddenly dumping inventory on the market." (p. 37)
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24/ More recently, Jamie Mai had an interesting idea for trading heavily contangoed futures: short oil on the futures market and hedge the trade by storing physical oil on a tanker.https://twitter.com/ReformedTrader/status/1206057238911021057 …
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25/ "Kosuga and Siegel double-crossed the onion growers. They joined the sellers, knowing the price would go down, and prepared to deliver onions that they had said they would hold off the market. They helped drive prices down to ten cents a contract and made millions." (p. 42)
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26/ "The price got so low that onions were worth less than the bags that held them. Growers angrily plowed onions back into the fields. Cars on tracks at the rail yard were full of worthless onions, and their unlucky owners had to pay rent to keep them there." (p. 42)
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27/ "In 1958, PResident Eisenhower signed the Onion Futures Act. "The Merc tried to get the onion ban reversed.... Many onion growers now hated the traders. Without growers, and people who wanted to hedge, they didn't have a viable market. The traders dropped their court battle.
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28/ "The Merc needed something else to trade to justify keeping the floor open. The governers of the Merc, inventive men, started thinking, and that's when the law of unintended consequences kicked in. In an attempt to contain the futures trade, Congress unleashed it." (p. 44)
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29/ "They needed a product with prices that fluctuate, which would attract people in the business who wanted to hedge away risk as well as traders who wanted to speculate. To fit the mold of the typical commodity, it needed to be seasonal, storable, and gradeable." (p. 46)
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30/ Pork bellies: "The reason a futures contract could work was that the packer had risk. If prices went down, he could get stuck with a bunch of frozen pork bellies that had lost value. "This seasonal problem created a trading opportunity." (p. 47)
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31/ "Some might have thought that cattle ranchers would use futures conservatively, as insurance. Instead, they became some of the riskiest speculators, doubling down on the bet they were already making with their livelihood (putting on 'the Texas hedge')." (p. 66)
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