Futures growth partly blamed for misdeeds

Press, 21 August 1989, Page 14

Futures growth partly blamed for misdeeds

By SHARMAN ESAREY NZPA-Reuter Chicago

A racketeering and fraud scandal that has rocked Chicago’s giant futures exchanges this summer could be due in part to their mushrooming growth in recent years, industry experts say.

The sheer number of new traders may have allowed corruption to exist, or persist, undetected. “It’s too simple just to focus on individual greed,” said Robert Bies, an assistant professor at Northwestern University’s J. L. Kellog, Graduate School of Management. Forty-six traders, members of the Chicago Board of Trade and the Chicago Mercantile Exchange, were indicted in early August following a two and a half year federal investigation. The exchanges themselves were not accused of any wrongdoing.

The charges include racketeering, mail fraud, commodities fraud relating to the theft and skimming of customer profits, filing false tax returns, lying to federal agents and conspiracy to defraud the Internal Revenue Service.

“The major cause is the enormous expansion in activity which brought many new actors into the business,” said Gale Johnson, a business professor at the University of Chicago.

But some traders blame financial woes as a possible cause. Behind the public image of millionaire traders lusting for more money there are many who scramble to eke out a living, they say. Dependent on commissions earned on customer trades, some traders have watched their profit margins dwindle while risk remains large. Over the past decade, the number of seats at the CBOT has grown to 3571 from 1402. The Mercantile Exchange has added two divisions since 1972, which have contributed more than 2000 seats to the original division, which now has 625 seats. “In the old system if someone was a shady operator no one would deal with them,” said Johnson. "Operations have become so large this self-regulating mechanism was seriously and adversely affected.”

The number of futures contracts — agreements to buy or sell specific goods and quantities at a set price and future date — have increased significantly. “Because of the speed of the transactions, the paper trails are much harder to create that will detect any misbehaviour,” said George Stigler, a former CBOT public governor and business professor at the University of Chicago. “I just have to believe the surveil-

lance system wasn’t working adequately,” he said. It was “not done as effectively as it should have been up to now.” Commissions to independent floor brokers have fallen to between US75c to SUSI.2S a contract from about SUSI.SO to SUSI.7S several years ago, traders said. Though many brokers handle more business now than ever before, which should boost their earnings, an increase in market price swings raises the likelihood of making expensive mistakes. That risk of innocent errors, which some say make up 20 to 25 per cent of the total trades, falls heavily on the trader. "I’ve seen brokers’ accounts where one big out-trade (a mismatched or incomplete trade) literally wipes out the whole month’s profits,” said an industry lawyer.

Under exchange rules, a trader can never profit from an error made on a customer order. A trader must replace a customer’s missed profits. If the mistake spared the customer a loss, the customer- and not the trader benefits. “Part of the reason for them to do this (skimming) is that they don’t get the winners. They just get the losers. Some say ‘Hey, screw this,’ ” said a Treasury bond futures pit trader.