Making a Small Fortune in the Commodity Market
Since returning to Chicago from Athens, Ohio 30 years ago, I have often been asked why I left my tenured teaching job to trade commodities in Chicago. I borrowed my pat answer from the notorious bank robber, Willie Sutton. When asked why he robbed banks he is reputed to have said, “because that’s where the money is.” Since it is the custom of our Club to entitle papers cryptically, I have chosen my title as a teaser to disguise my real subject matter. The short answer to the question, “how to make a small fortune in the commodity market,” is to start with a large fortune. Unfortunately when I started trading at the Mercantile Exchange in 1978 I had neither a large fortune, nor a small fortune. In fact I was almost dead broke. So I do not have an easy get-rich-quick scheme. Instead I will tell a tragic/comic story about how I made and loss more than one small fortune. It is also a story of redemption, how my son, Michael redeemed his time as a wayward youth and in so doing redeemed me from bankruptcy.
My story begins on May 4, 1970,
the year of the Kent State university shootings, also known as the Kent State massacre. You may
remember that the Ohio National
Guard shot and killed four students and wounded nine others. The
students were protesting the American invasion of
Cambodia, which President Nixon announced in a
television address on April 30.
In response to the shootings hundreds of universities, colleges and high schools closed
throughout the United States.
At
that time I was an Associate Professor of English at Ohio University. Like
other state universities, we had to recess early for the summer because of the
student riots. The tumultuous events of that year were a grueling challenge for
Claude Sowle, the new 40 year-old president of the university. The conservative
Board of Trustees chose Sowle because of his law and order background. He
had graduated at the top of his law class at Northwestern University and had
been dean of the law school at the University of Cincinnati. Unfortunately, he had no
experience teaching undergraduates. He was aware of that handicap and looked
for an assistant who had interacted with the students during the riots. Because
I was chairman of the undergraduate committee in the English Department, the
largest department in the university, and had been visible on campus during the
unrest, he asked me to be his assistant.
My
first assignment was to organize and supervise three days of hearings of a
committee of the Ohio State Legislatures. The committee had the mandate of
assessing the causes of the riots and making recommendations for legislation. I
could tell after the first day that I was witnessing the posturing of a
kangaroo court. Three of the five legislatures were Republicans, as was
Governor Rhodes, who had approved the shootings at Kent State. In my opinion
the legislators were mainly interested in playing for the media back in their
districts. They interrogated students
and faculty in admonishing tones to demonstrate that they were going to bring
law and order to the campuses. After
that assignment my fortunes as assistant to the president went on a downward
cycle. I never knew if it was my
disagreement with the conclusions of the legislative committee, or my
personality mismatch with President Sowle. For whatever reason, he relieved me
of my duties as his assistant just in time for the Christmas vacation. I was
disappointed to be fired from my first job as a university administrator, but I
was relieved to return to my tenured position in the English Department.
Aside
from a blow to my ego, my wife, Carolyn, and I faced a grim economic future. I
had been given a $10,000 raise as assistant to the president, but I had to
revert to my $14,000 academic salary. The consequences of the state legislators’
evaluation were soon evident and continued to worsen. All the state
universities’ budgets were severely curtailed. Cutbacks meant faculty hiring
was frozen, and some were fired under the rubric of financial exigency. The
English Department faculty continued to receive minimal cost of living raises,
but we were not paid for summer school teaching, and the sabbatical leave I had
expected never materialized. Carolyn and I went on a program of deficit
spending, but our futile efforts with the prospect of putting five children
through college, were not enough to stem the tide of insolvency. Despite our economic stress and the political
turmoil going on in the country in those days, they were happy years for our
family in Athens, an idyllic small town environment to raise children.
My
friend, Don Stevens, had set the example for me in piling up a small fortune at
the Mercantile Exchange. He had started as a runner at the Packers Trading
Company and worked his way to be Vice President. He was genetically drawn to
the frenetic excitement of the commodity markets, for he had been, ever since I
knew him in high school, an addicted horseplayer. He never kicked the habit,
but he made enough money in the market to support his addiction, so much so
that he could buy trotting horses of his own, frequently with his partners at
the Merc. While Don was piling up his small fortune I was trying to shore up my
eroding molehill. He had often suggested that I could make my own fortune if I
left academia.
What
convinced me to try trading was a serendipitous meeting with him in Columbus. I
was there for a humanities conference at Ohio State University, and he was
there with trader friends for the harness races at Scioto Downs. I met them for
a drink before the races in their suite in a Holiday Inn near the racetrack,
where they were handicapping the evening’s races. A bottle of JTS Brown bourbon
sat conspicuously on the coffee table, from which they imbibed with regularity.
One of Don’s partners, Tommy Crouch, dominated the conversation. Short, stocky
and rotund, with a loud voice, he talked in a staccato cadence with a long
Cuban cigar sticking in the side of his mouth, reminiscent of Edward G.
Robinson. Tommy dispensed with the courtesy that usually precedes an
introductory conversation. He asked me what I was doing in Columbus and where I
lived. I answered that I had come to Ohio State for a humanities conference but
lived in Athens, about 75 miles southeast.
“What
da you do there?” he asked.
“I
teach at Ohio University?”
He
smiled and seemed mildly curious. “How much do you make?”
“$14,000 a year,” I volunteered.
“And
what do you do?” he inquired.
“I
teach English and do the usual things-- lecture, lead discussions, grade
papers, try to imitate a professor.”
“And
you only get paid fourteen grand? Why, you could follow me around the Merc and
make that much picking up what I drop on the floor.”
His
hyperbolic, ribald banter, typical of the culture on the trading floor of the
Merc, aroused my competitive spirit. I noted the JTS Brown whiskey on the table
because Paul Newman and Jackie Gleason drank that brand in the Hustler, a popular movie adapted from a
novel by Walter Tevis. Walter was at that time my colleague and poker -playing
buddy in the English Department. “If you have that kind of money to drop on the
floor, why are you drinking JTS Brown?” I retorted. I had never tasted the
brand before, but I knew that Walter chose it as a marker for his small time
pool hustlers because it was cheap. As a
reward the distillery sent him a case every year for the sales boost Paul
Newman and Jackie Gleason gave to a little known brand of whiskey. This bit of
serendipitous lore gave me more credibility with Tommy than my credentials as
an English professor. I returned to
Athens that night with delusions of riches.
I
had been in denial about our financial situation, mainly because Carolyn
handled our checking account. But she made me face up to the actuarial fact
that at our current rate of deficit spending, we might be on welfare in a few
years. One day while reading Aristotle’s discussion of the moneymaking art in
his Politics, I had an epiphany.
Although the Philosopher does not put trading in the market high on his
hierarchy of human virtues, he says that if you want to pile up wealth you
should go to where wealth is piled up. This obvious piece of wisdom may have
inspired Willie Sutton’s answer to why he robbed banks. To me it seemed to be a
message from a higher power like that experienced by St. Paul when he was
struck off his horse on the road to Damascus.
In
the fall of 1977 we faced a crucial family decision. At the end of the winter
quarter I would be faced with six months of enforced leave without pay. In
those days the Mercantile Exchange did not allow traders to rent seats, but Don
arranged with his partners to let me trade with one owned by Packers Trading
Company rent free. He also took me to the Harris bank and arranged a note for
$10,000. In those days one could open a trading account with as little as
$5000. I planned to use the other $5000 for living expenses.
I
started my first day with mixed emotions. Don told me to observe the action in
the gold pit until I felt confident to risk a trade. Gold was the highest
volume commodity traded at the Merc. The action and turmoil reminded me of how
Milton describes the circles of hell in Paradise
Lost, but I couldn’t decide whether the action in the gold pit was more
like Pandemonium or Chaos. Chaos is a place of random disorder, but the
disorder in Pandemonium has a diabolical intelligence controlling it. I am not
sure, but I am inclined to think that the gold pit was a species of
Pandemonium. It seemed that there was
some method in the seeming madness, that a diabolical manipulator could control
my bottom line. But I seemed to have no other choice but to give it a shot.
“How will I know when to buy or sell?” I asked naively. He smiled, and said, “Watch the action for
awhile and then buy when the price is low, or sell when it is high.” That seemed like sensible advice, but it
didn’t help me, since I didn’t know anything about what influences the price of
gold.
I
traded gold for a week, but it seemed hopeless. I did not have enough to risk
more than a one-lot trade, and the brokers did not like to waste time trading with
a one-lot trader. After losing about $500, I decided to try the German
Deutschemark pit, the most heavily traded foreign currency. With no background
in finance or economics, I had to learn in the school of hard knocks. I was
scheduled to return to Athens to teach in the fall quarter, but by the end of
June my $5000 trading account had dwindled in half. I returned to Athens for
the July 4th weekend discouraged and depressed with the intention of
cutting my losses. Carolyn, however, urged me to screw my courage to the
sticking place. Her encouragement was enough to give me the balls to go back
with a different attitude. By trial and error I figured out how to day-trade
the Deutschemark and arbitrage it against the Japanese Yen and the Swiss Franc.
By the end of the summer my trading account started to show a profit.
About
that time I had a piece of good news from Washington. Two years earlier, I had
proposed to the dean to develop a master’s program in Liberal Arts. I had
written a proposal to the National Endowment for the Humanities, and it was
approved, a $50,000 grant for a one-year pilot program to develop a curriculum.
In those days there were no more than 15 such Master’s Degree programs in the
country; now there are now about 200, most notably one here at the University
of Chicago attended by our esteemed president, Steve Thomas. I was, of course,
pleased with this award, but it posed a dilemma. Because I was the director of
the incipient program and the executor of the grant, I had to decide whether to
return to the university, or to ask for an extension of my leave of absence to
continue trading commodities. This dilemma turned out to give me leverage to
work out a deal with the dean. He agreed that I could trade four days a week in
Chicago at the Merc and develop the master’s program after trading hours on the
phone and on the weekends in Athens.
The
arrangement was somewhat irregular, but not unprecedented. Faculty members in
business and engineering accepted consulting assignments and research grants
from governmental agencies while they taught at the university. None whom I
knew, however, were trading foreign currencies on a commodity market. And I was
sure that I was the only Shakespearean in the Deutschemark pit at the Merc. I
was not comfortable making my dual pursuits known widely. At that time the late Senator William
Proxmire used to grab headlines every now and then with his announcement of the
Golden Fleece Award. He bestowed this honor on a free loader who notoriously
wasted money on some self-serving but dubioua research project, such as a grant
to the Office of
Education for spending $219,592 to teach college students how to
watch television. I had no qualms about accepting $50,000 to develop a graduate
program in Liberal Arts, especially because my stipend from the grant would
amount to no more than a pittance. But
my trading Deutschemarks in Chicago while accepting a stipend from the National
Endowment for the Humanities for work done in Athens might well have been
misconstrued by a zealous muckraker. However fond I am of publicity, I didn’t
covet the “Golden Fleece Award.”
I
began what turned out to be a three-year project of developing the program
while working four days a week in Chicago and weekends in Athens. But this
arrangement was economically untenable and physically and emotionally draining.
While the program grew modestly, my trading at the Merc became more profitable.
My tentative success in trading the Deutschemark did not result from any
new-found understanding of the fundamentals of the markets. Like my
bewilderment at what influences the price of gold, I had no idea why the
currency market fluctuated wildly. In an ordinary trading day it might
fluctuate by a half dollar. A half dollar on the spot market was equivalent to
$500 on a futures contract. Almost
immediately I had a crash course in the unpredictability of the price of a
futures contract. It was Oct 16, 1978. The market, which had been quiescent all
morning, suddenly plunged the allowable limit of $1500 in a matter of minutes,
and then almost as suddenly, the market rebounded and rallied $3000 to go limit
up. After that wild ride, Bill Hickey, the deck holder in the pit went to the
phone and came back in a moment to announce the news that the “new Pope is a
Pollock.” I never could figure out why
the election of a new Polish Pope would rattle the currency market, but such
was one of the lessoned learned in the school of hard knocks. After the market
settled down I calculated that I had wiped out a two-week profit in about 20
minutes.
Over
the next few years I had gained enough confidence to move beyond the currency
pits to trade in almost every pit on the floor. Some commodities were waxing in
volume, while others were waning and eventually died. When options trading were
introduced on S&P futures, I moved to that pit to seize the opportunity. As
one of the first traders of S&P options I started to make easy money immediately,
not because I knew much about trading options, but because relatively few local
market futures makers knew more. Because I had little understanding of the
hedging purpose of a “put” or a “call,” I made the same assumptions about
options as I had as a futures trader. That was a recipe for disaster. After
building up a small fortune in a comparatively short time, I loss it in an even
shorter time when the stock market rallied sharply in fall of 1984. I was
caught holding a position of short calls that turned my small fortune into a
debit, which caused my clearing-house to liquidate my position.
Carolyn
and I rationalized that the blow to my ego might be morally good for me, a
punishment for my hubris. We recalled the biblical warning that pride goeth
before a fall. We had to start over
again. About that time the Merc introduced options trading on agricultural
products. I assumed that my experience as a trader of S&P options would
give me a leg up as an option trader in the nascent cattle option pit. And I was
right. Cattle options caught on when cattle breeders learned to insure their
sales against precipitous declines in prices by buying puts and selling calls
on their herds of live cattle. Again it seemed to me like found money, because
I assumed as a city slicker that the yokels out in the red states would buy
overpriced puts and sell calls at bargain prices to hedge their live cattle.
After all that was the name of the game. Sharp-eyed speculators assumed risked
for producers unwilling or unable to take it themselves. I remembered Tommy
Crouch’s comment that he dropped more on the floor every day than I could make
teaching English at Ohio University. It seemed too easy, and it was too easy.
By
the middle of 1987 I was riding high, but also riding for a fall. I had made
enough money to buy a seat on the Exchange. We had paid tuition for five
children in various stages of undergraduate and graduate education. My oldest
daughter was married on August 30, our 30th wedding anniversary. We
celebrated with a fine reception at the Newberry Library, the first time that
beautiful venue had been rented for a wedding reception. I had accumulated
enough money to capitalize four traders, who had worked for me as clerks over
the previous five years. Carolyn and I were looking forward to retirement. I
intended to become more committed to teaching as an avocation, which I had been
doing irregularly at the Newberry Library and Shimer college since leaving
Ohio, and I was planning to open an antiquarian book store.
Then on October 19, my dream of spending the future in Homer’s Elysian Field turned into the nightmare of Sisyphus. “Black Monday” is the name given to Monday, October 19, 1987, when the Dow Jones Industrial Average dropped dramatically, and on which similar enormous drops occurred around the world. That was 20 years ago last week. It was the second largest one-day percentage decline in stock market history. I heard the news on the radio driving to the market from a breakfast meeting of the Board of Trustees of Shimer College, of which I was then a member. By the time I arrived at the Merc every commodity market on the floor was down the limit. It was difficult for me to comprehend what was going on. Why was the stock market crash affecting the price of cattle? A certain degree of mystery is associated with the 1987 crash. The decline seemed to have come from nowhere. Markets around the world were put on restricted trading primarily because sorting out the orders that had come in was beyond the computer technology of the time. The Federal Reserve and other central banks pumped liquidity into the system to prevent a further downdraft, but pessimism reigned, the excess value was squeezed out of the system.
This meant that almost everyone in the market was heading for the exits, except for fools like me whose open position of hundreds of long calls and short puts could not be closed out. This also meant that prices were inflated well above their value in the market. By the end of the day my option position was the equivalent of several hundred long futures with the market locked limit down. My lost for the day on paper was over $500,000, but the theoretical lost promised to be much worse when the market resumed trading. In addition the three traders in my group wiped out their accounts, which I had funded. The cattle market was limit down for several days. When the market finally started trading, I could not meet margin calls. My clearinghouse liquidated all my positions at bargain basement prices.
I have had difficulty writing this paper, because I have been in denial about that catastrophic loss for 20 years. I can no longer rely of my late wife, Carolyn, for the details of my fiasco. She would remember because she had a phenomenal memory and would not blanch at the unpleasant reality. Lucky for me she kept her head and supported me throughout the ordeal and the long road back to solvency. As far as my memory can reconstruct my bottom line, when the dust settled, I owed the clearinghouse over $2,000,000. That was chicken feed compared to what others had lost that week. The Chicago Tribune published a list in its financial section of the losses by traders at First Options Futures. My debit was not large enough to rank me among the top fifty losers. Many of those traders went bankrupt, and some were rumored suicides; at least one fled to China, his homeland with almost a fifty million dollar loss.
My day of reckoning came swiftly. First Option Futures was owned by the Continental Bank, which was having wide and deep problems quite apart from the market melt down. I was called to the corporate offices of the bank on La Salle Street for a meeting with the managers of First Options, a vice president of Continental bank and his lawyer. It is not an understatement to say that I was at a negotiating disadvantage. I was discombobulated from reeling in the pit for over a week, and I had no appreciable assets except our home, my Mercantile Exchange seat, which was selling for about $300, 000 at the time and our life insurance policies. If I were thinking clearly I should have insisted on having a lawyer with me when I sat down in a power meeting to negotiate a settlement. The managers and lawyers turned out to be hard bargainers but not condescending or aggressive. They had no ax to grind with me except the debit they intended to recoup for the bank. In retrospect I should have calculated that they knew that they couldn’t get blood out of a turnip. In short they couldn’t afford to fire me, for there were no assets to reap. I could have filed for bankruptcy, but that was not a mark I wanted to record on my curriculum vitae. They laid out terms that at the time seemed reasonable. They would allow me to continue trading with strict monitoring if I turned over all my liquid assets to them including my Merc seat. They put the appraised value of the seat in my trading account but controlled my withdrawals of funds. They reasoned from assessing my profitable trading record that I ought to be able to trade off the debt with strict controls. For every dollar I took out for living expenses, I had to pay First Options Futures a like amount.
That was the biggest debacle in my life and the most serious problem Carolyn and I had faced as a married couple. It had a debilitating effect on my personality and outlook on life. When I went for my scheduled physical exam, my doctor recommended a psychiatrist for therapy. The psychiatrist asked a few questions, but not what I expected to be a probing attempt to discover the cause of my depression. He said that there was probably nothing wrong with me that two million dollars wouldn’t cure. He gave me a prescription for an anti depressant, which I took for a couple of weeks. I gave it up, however, because it was causing me a dry mouth, and I could see no way that a pill would help pay off my debit. The road back to solvency was long, arduous and filled with potholes and ambushes. We had to alter our life style. Carolyn took a job as an editor for a children’s book publisher. Fortunately our four daughters had finished college, but they had to borrow money for graduate, law and medical schools. Our only son, Michael, was an undergraduate at the University of Chicago. He had to take out a loan and work part time in the student center. Upon graduation he passed the Foreign Service examination, but the State Department put a freeze on hiring that year. With his name on a waiting list, he came to work with me at the Merc.
If my story were to end here, it might qualify as a mock tragedy—a story about a small time over reacher brought to a sad end because of hubris. But I prefer to think of the story as a comedy. A comedy has an inherent tragedy in its structure. To put it another way a tragedy is an unfinished comedy. If any of Shakespeare’s romantic comedies ended after the fourth act they would be tragedies, as would Dante’s Divine Comedy if it ended after the Inferno, the first canticle.
At the nadir of my fortunes in October of 1987, with the help of my son, Mike, we slowly started to dig out of the hole. I credit my comeback to Michael’s talent and commitment, the support of my wife, Carolyn, and our four daughters. Mike had become familiar with the markets from his summers working for me. In addition, all but one of his older sisters, as well as his mother, had brief experiences as traders and clerks at the Merc. But Mike had additional talent. He had a louder voice; he was more aggressive and had better aptitude for numbers. Most important he understood the theory of options markets. When he started trading we worked together as a tag team. He traded in the cattle option pit, and I traded in the cattle futures market. It did not take him long to become a better trader than I. With him taking the lead we paid off my debit in five years. It is a cliché at the Merc, that trading in the pit is a young man’s game, but he proved the cliche to be true. To mark the event in 1993 we threw a “Going Broke” street dance on Hinman Avenue in Evanston.
My disaster in 1987 had a sobering effect on him as it did on our whole family. But Michael in particular had to grow up before he was ready to take on responsibilities as an adult. Whereas his older sisters never had truancy problems in school, he had spent his years at Evanston high school hanging out with friends who were not academic role models and who liked to party, but his grades were good enough to gain admittance to the University of Vermont. There he dafted away his first two years until he came to realize that he was wasting time. After stopping out for a couple of years he was admitted to the continuing education program at the University of Chicago with the help of Gwen Kolb, a friend from the Caxton Club and an emeritus professor of English at the University. After a probation period, his grades were good enough to gain him admittance as a matriculating student in philosophy.
I cannot go into detail about how we finally made the small fortune that erased my debit and enabled me to retire from trading commodities. That would require another paper. Suffice it to say that trading commodities from a deficit position puts added pressure on a risky business, and our trading partnership created the same tensions as so often happens when money is at stake. This tension caused concern for Carolyn. She felt Mike was depressed because I had put him in an unfair position in helping pay off my enormous debt. At her urging we had several separate sessions with a therapist. Our major problem, as I saw it, was that we could not communicate unemotionally about money, and that carried over into other aspects of our relationship. The therapist made a few salutary recommendations, but others caused us to give up on the therapy. For instance he recommended that we trade in separate accounts and change our life styles. He told Michael that he ought to stop living like a hippie, spruce up his appearance and drive a late model car. His recommendation to trade separate accounts turned out to be helpful, but how Mike dressed and what model car he drove seemed beside the point. It seemed to Mike to trivialize his sense of obligation to pay off my debt. But the most severe dose of therapeutic medicine that caused us to stop the therapy was his advice that we both quit drinking. Neither of us could see or would admit that our drinking was the cause of our friction in the cattle pit. I was willing to continue the therapy even though I was not willing to stop drinking cold turkey. But thank God, the father-son bond reestablished itself as we both agreed that a good glass of wine went a lot further than therapy sessions or shiny new cars. The problem, upon firing our therapist, was how to explain to his mother why we had discontinued therapy. Mike maintains to this day that he alone was brave enough to break the news to his mother that we were leaving therapy, but I think I was the one who did it, although I did not admit that it was because the therapist recommended that we stop drinking. I trust now that our problems are behind us if not entirely solved, and that Mike has become not only my benefactor, but also my friend.
I said that Shakespeare’s tragedies are unfinished comedies. I might add that his history plays, with perhaps the exception of Richard III, are structured as comedies, none more so than King Henry IV Part One. In that masterpiece, the hero is not King Henry, but his son, Prince Hal. Prince. Hal spends his youth carousing and cavorting with unsavory companions, like his drinking buddy, and surrogate father, Falstaff. But early in the play, in one of his best known soliloquy, Hal leads the audience to believe that his seeming wayward behavior is simply an act to disguise his real intent of rescuing his old man. Here is how the Prince describes that he will redeem his time and his father’s kingdom.
If all the year were playing holidays,
To sport
would be as tedious as to work;
But when they
seldom come, they wish'd for come,
And nothing
pleaseth but rare accidents.
So, when this
loose behavior I throw off
And pay the
debt I never promised,
By how much
better than my word I am,
By so much
shall I falsify men's hopes;
And like
bright metal on a sullen ground,
My
reformation, glittering o'er my fault,
Shall show
more goodly and attract more eyes
Than that
which hath no foil to set it off.
I'll so
offend, to make offence a skill;
Redeeming
time when men think least I will.
The Prince not only redeems his time as
a delinquent adolescent, but emerges at the end of the play by vanquishing
Hotspur and routing the Percy clan who fomented the rebellion against the King.
Prince Hal goes on to be King Henry V, the most revered monarch in English
history before Queen Elizabeth. I don’t have any delusions about Michael’s
potential for kingship, but I should think that he could run for precinct captain
in time for the next election and help redeem the presidency.
Ed
Quattrocchi
Evanston,
Illinois
Read at the Chicago Literary Club,
October 29, 2007