1872, a group of dairy traders established the new york Bartland Cheese Exchange. The exchange was originally located in a building at the junction of Greenwich Street and Chambers Street. The building is close to the freight terminal, and the owner is a sugar processing enterprise. The exchange rented several rooms here.
(Figure 4-0 1: new york Butter and Cheese Exchange)
At that time, the annual wholesale volume of butter and cheese products in new york had reached 1 billion dollars. A year later, the exchange won most of the trading volume. Later, eggs became the trading variety, and the exchange was renamed as butter (new york Cheese and Egg Exchange).
Editor: See Chapter 1. CME, formerly known as Chicago Mercantile Exchange, was established in 1874 to trade butter. After 1898 became a trading variety, the egg was renamed ChicagoEggandButterBoard.
Traders gather in the center of the trading hall to bid and counter-bid, and exchange employees record the latest market on the huge blackboard on the wall in time. Each blackboard is managed by two people, a left hand and a right hand. This ingenious arrangement allows two staff members to work at the same time, without touching each other's elbows and blocking the traders' sight as little as possible. Soon, traders learned to distinguish their accents, and they could tell who was quoting without turning to look at the blackboard. Octagonal futures pittrading Pool was first launched in CBOT at 1870, and then became popular in new york. New york's trading pool is also surrounded by brass and thick ropes, similar to the setting of a boxing ring.
(Figure 4-02: new york Butter, Cheese and Egg Exchange)
1882, that is, in the same year that NewYorkIronandMetalExchange and IronandMetalLimited, the predecessors of COMEX, were founded, new york Butter, Cheese and Egg Exchange added varieties such as dried fruit, canned food and chicken. This time, the transaction has a new NYMEX, the New York Mercantile Exchange. Editor: What do you think of new york Butter, Cheese, Eggs, Dried Fruit, Canned Food and Chicken Exchange? )
The second is the New York Futures Exchange (NYMEX)
In view of the expansion of the transaction scale, the leadership of NYMEX hired Thomas Moore. Mr. Jackson, a famous designer in new york, designed the new trading building. He didn't let everyone down. The building built in 1884 is six stories high and made of granite and bricks. The retro style of Queen Anne and Rome runs through the whole building. The trading hall is located on the second floor, two stories high, with granite columns, marble floors, exquisite masonry and mahogany carvings.
(Figure 4-03: the New York Mercantile Exchange Building, 1872- 1884)
(Figure 4-04: Original appearance of NYMEX Building, 1885- 1977)
(Figure 4-05: the New York Mercantile Exchange Building still stands on Harrison Street)
NYMEX's early transactions were all spot transactions. Accurately speaking, the exchange is an agricultural product wholesale market initiated by the trade chamber of commerce and participated by traders and leading enterprises. Standardized spot trading, after a long time, has gradually evolved into trading agricultural products that will be produced in the next few months or even years, resulting in forward trading and futures trading. With the passage of time, futures contract trading completely replaced the spot trading in the trading pool.
(Figure 4-06:1NYMEX trading hall in 1950s +65438, brokers accept customers' orders by telephone)
194 1, potato futures listed. Five years later, onion futures began to trade. From 1950s to 1970s, platinum, silver, gold, fuel oil and crude oil were listed and traded one after another. However, the potato futures manipulation case of 1976 and the subsequent punishment imposed on NYMEX by the regulatory authorities made NYMEX change its mind and move towards the road of developing crude oil futures in the case of poverty.
Three. Maine potato futures
Potatoes (also known as potatoes) are an important staple food for Americans. They are not only directly edible dishes such as baked potatoes, stewed beef with potatoes and potato salad, but also processed into French fries, potato chips, potato cakes and mashed potatoes in large quantities.
(Figure 4-07: Delicious Potato Recipe)
There are more than 100 potato varieties in the United States, with the largest yield being reddish brown potato, red potato, white potato, yellow potato and blue/purple potato.
(Figure 4-08: Various Potatoes)
193 1 year, CME listed the earliest potato futures contract, the target of which was mainly IdahoRussetPotatoes). The New York Mercantile Exchange is produced in Iowa. The potato futures introduced by NYMEX at 194 1 are based on MainePotatoes.
Because the United States Department of Agriculture (USDA) subsidized the price of potatoes, futures trading was not active at first. Until 195 1, after the cancellation of the potato price support plan, the spot price fluctuated frequently, and the futures trading volume increased rapidly, and the NYMEX potato contract became the main trading contract in the market.
(Figure 4-09: Early Potato Storage Warehouse)
(Figure 4- 10: NYMEX Potato Futures Brochure)
By the 1970s, great changes had taken place in the potato industry in the United States. 1. The potato planting area in Maine has been declining year by year, but the market demand has not declined, and the contradiction between supply and demand is prominent. Second, the total potato production in the United States is actually increasing. Washington on the west coast has become the largest potato producing area, followed by Oregon and Idaho. The main variety in the western producing area is brown-skinned potato. Third, the potato production cycle is spring ploughing and autumn harvest. Winter and the following spring are the peak seasons for sales. The commercial stocks of potatoes were exhausted in April and May, when the contradiction between supply and demand was the most serious.
NYMEX's potato futures have not kept up with the development of the industry. The spot subject matter of potato futures is 50,000 pounds of Maine potato, equivalent to 22.6 tons. There are four kinds of contracts available for trading in March, April, May and November. May is the main contract, which represents the fierce game between the trading parties during the handover of potatoes in the new season and the old season. Futures are delivered in kind and only white meat potatoes produced in Maine are accepted. Potatoes from other varieties and other producing areas are not allowed to participate in delivery. The place of delivery is located in new york.
In the mid-1970s, potato futures was the most active variety of NYMEX trading, and the problems in futures trading had a great impact on the exchange and most of its members. First of all, due to the decline in potato production in Maine, the deliverable quantity is insufficient, which is easy to form a forced position. Secondly, the futures price fluctuates violently, so it can't return to the spot price in the delivery month, which makes the delivery cost rise and the hedging effect weaken. Thirdly, other varieties and Maine potatoes have different price change factors because of different eating and processing purposes. Farmers in western producing areas use Maine potato as a hedge for related varieties, and the effect is very poor.
Iv. 1976 potato futures manipulation case
After introducing the background of potato futures, let's review the potato futures manipulation case of 1976.
JackRichardSimplot, a potato producer in Iowa, is with PeterJ J. Taggeres, a potato distributor in Washington State, sold 2000 potato contracts in May. According to a contract of 50,000 pounds, their total position is 1 100 million pounds of Maine potatoes. You know, the total potato production in the United States was about 300 million pounds, and the potato production in Maine was about 20 million pounds. In addition, according to the regulatory requirements of CFTC, potato futures with more than 25 lots belong to large households and need to be declared. It can be seen how big their transaction scale is.
The Iowa potatoes produced by Simplott cannot be delivered according to NYMEX rules, so they plan to buy a lot of potatoes in Maine. Simplott shipped a lot of potatoes from other States to Maine because there was not enough cash in the market. In this way, the supply of potatoes in Maine is sufficient and the price drops.
Simplott made a huge profit on the empty order in May, which made the bulls quit. Because all potatoes have to be delivered in new york, Bull organized a group of people to buy out all railway wagons from Maine to new york, which made Simplott unable to deliver! After closing the first batch of 65,438+0,000 empty lots, Simplott defaulted on the remaining 65,438+0,000 lots on May 25th, the last trading day, and could not deliver 50 million pounds of Maine potatoes.
The breach of the main contract with the largest trading volume is a great shame for the exchange, and NYMEX's reputation has been seriously damaged. The exchange then launched an investigation and hearing on the breach of contract. In the end, NYMEX ruled that the fair market price of the May contract on the last trading day was 10.66 cents/pound, which was higher than the closing price of 8.70 * * *10.96 cents. A contract costs 5000 pounds, and the total difference is 980 dollars. The exchange ruled that the defaulting party should pay the difference to the other party.
(Figure 4- 1 1: JackRichardSimplot, Aihe Chinese businessman)
As the exchange only deals directly with its members, the fine is levied on three futures companies, namely Thomson &; Mckinnon, Auchincloss, Kolmelink. ，HeinholdCommoditiesInc。 , and theClaytonBrokerageCompanyofSt. Louis Futures Company charged their client Simplot a fine.
At the same time, the bulls hired lawyers to sue Simplott Group for manipulating the price of potatoes, forcing it to close its position at a price lower than the market price on the last trading day and suffered huge losses. The New York Mercantile Exchange's liquidation committee finally ruled that Simplott should be fined 5.33 cents per pound of potatoes. One contract is $2,665 (50,000 pounds), and the total penalty for 1 0,000 lots is $2.665 million. Together with the difference of $980,000 previously paid, Simplott paid $3.645 million for the potato manipulation case. This is a huge sum of money in 1976.
Because Simplott made money in the first empty order of 1000, the purpose of this fine is to make him spit out the illegal profits and ensure that no one can make profits by manipulating the market. However, things are far from over. The potato manipulation case had a bad influence, and CFTC, the US futures industry regulator, intervened.
Five. The new CFTC official takes office with three fires.
Since the establishment of 1848 CBOT, the futures industry in the United States has been managed by various exchanges. 1922 In September, the US Congress passed GrainFuturesAct and established GrainFuturesAdministration, which officially started the government's supervision of the futures industry.
1936, the congress passed the CommodityExchangeAct, which replaced the bill of 1922. The United States Department of Agriculture (USDA) established CommodityExchangeAuthority (CEA) under the authorization of the bill, which became the regulatory department of the futures industry.
Readers may ask, why is the futures industry regulated by the Ministry of Agriculture? This is because futures trading was originally developed from agricultural trade. When the bill was passed, the varieties of futures were still mainly agricultural products, so it was logical to put them under USDA.
In 1970s, futures products expanded to energy and metals, as well as financial futures contracts such as foreign exchange and stock index. 1974, the United States Congress passed the Commodity Futures Trading Commission, which replaced the Commodity Trading Administration under the Ministry of Agriculture and became a new independent futures industry supervision department until today. The highest authority of CFTC is the Agriculture Committee of the United States Congress. From here, we still see the agricultural origin and historical inheritance of the futures industry.
(Figure 4-12: official badge of CFTC)
CFTC officially started work on 1975. President Gerald Ford appointed William. Bagley became the first chairman of CFTC. The first industry event that the new official encountered when he took office was the potato futures manipulation case. The new regulator needs to establish a strong position through strict law enforcement and rebuild the fairness and justice of the futures market.
(Figure 4- 13: WilliamT. Bagley, the first chairman of CFTC)
An episode: Professor MichaelGorham, the author's teacher, was the first market supervision director of CFTC from 2002 to 2004. Professor Gorham worked in the Federal Reserve and Chicago Business School. He is also my predecessor at CME, and now he is the dean of the Business School of Illinois Institute of Technology (IIT). The author is fortunate to know some internal operations and anecdotes of CFTC through the teacher. We will discuss it later in this book, which is another story.
(Figure 4- 14: Professor Michael Gorham)
On the second day after the potato contract broke down in May, Chairman bagley publicly stated that "this incident shows that there are serious problems in that trading market" (Washington Post,1May 26, 976). While the New York Mercantile Exchange was investigating the breach of contract in new york, CFTC held a public hearing in Washington. After a long period of evidence collection and hearing, CFTC concluded that NYMEX failed to do its best to solve the problem of potato futures default, which was a violation of regulatory responsibility. The self-discipline management of the exchange is not enough to ensure the smooth operation of new york commodity trading market, so CFTC must come forward to carry out stricter supervision and punishment.
The first penalty is to prohibit NYMEX from continuing to trade potato futures. CFTC gives market participants time to exit in an orderly manner. The ban will take effect on 1979 after all the contracts still being traded expire.
The second penalty is to prohibit NYMEX from entering new fields and listing new varieties that have never been traded. This punishment is almost fatal to the century-old New York Futures Exchange. Old varieties of butter, cheese and eggs have long since left the market. The largest variety of potato was forced to withdraw from the market, and the remaining varieties were platinum, palladium and hot oil, and the trading volume was not enough to support the operation of the whole exchange. If you are poor, change it. RichardLeone, then president of NYMEX, decided to take fuel futures as the breakthrough point and move towards a new direction of developing its upstream crude oil futures.
Coincidentally, the Chicago Mercantile Exchange, which acquired NYMEX 30 years later, also experienced a narrow escape from supervision and punishment, seeking a way out. 1958, the onion futures, which are the most active in CME trading, were banned from futures trading by the US Congress because they were involved in the market manipulation scandal. The bill removes onion from the definition of commodity and completely prohibits this variety from being listed and traded on any exchange. Such severe punishment is unique in the history of the futures market. The Chicago Mercantile Exchange learned from the painful experience and developed frozen pork balls to regain its foothold in the market.
Innovation is the only way out for the development of futures exchanges. We will return to this topic many times in later chapters.
1979, economist AllenB B. Paul and Katie. Kahl and WillamG of the Bureau of Economic Statistics, USDA. Tomek, a professor of agricultural economics at Cornell University, submitted an in-depth report to the US Congress: Looking at the performance of the futures market from the potato case.
(Figure 4- 15: USDA's in-depth report on potato futures manipulation)
According to the report, there are many kinds of potatoes in the United States, and there is no recognized standard variety in the spot market. No matter which variety is chosen as the futures target, it will lead to opposition from some people in the industry. Lack of benchmark is one of the main reasons for major problems in potato futures. Secondly, there are loopholes in the design of the delivery link of the contract, which leads to both long and short parties cheating by using the rules.
Experts from USDA gave two suggestions to solve the problem. According to them, one is a positive plan. The price of main potato varieties in major producing areas in the United States was compiled into a weighted potato price index, and then the NYMEX contract was revised to change the spot delivery to cash settlement based on the price index. This method solves the bottleneck of delivery, but it is still unknown whether it can be accepted by the industry.
Another negative solution is to limit the positions held in the futures delivery month to ensure that the trading volume is within the limited deliverable volume. At the same time, the deliverable potatoes will be expanded from Maine to neighboring new york and Massachusetts, effectively increasing the supply of qualified deliverable products.
In today's futures market, we see that both methods are being applied. Warehouse limit is very common, but its disadvantage is that it limits the effectiveness of spot traders in buying and selling through the futures market. We will discuss this important topic in later chapters.
Since 1970s, some American commodity futures have adopted the cash settlement method. A successful case is CMELeanHogFutures of Shang Zhi University. The United States passed legislation to let all pig-raising enterprises report the trade and price of pigs to the Ministry of Agriculture every day, so that USDA can grasp the spot market in real time. On this basis, the price index of lean pigs compiled by CME timely and accurately reflects the spot market and is accepted by the pig industry. In the spot trading of live pigs, CME price index and futures contract price are generally used as components of the pricing formula. If other varieties do not have these preconditions, the price index will not become the industry benchmark, and it will be difficult to promote cash settlement.
6. Who laughs last
JackRichardSimplot is not an ordinary potato producer. From 65438 to 0929, Simplott, who was only 20 years old, established his own company in the agricultural area of Idaho. During World War II, Simplott supplied dehydrated onions and potatoes to the US military. Soon, he became the largest potato supplier in the United States.
After the war, Simplott supplied potatoes to the catering industry. At that time, fresh potatoes were transported to every restaurant and needed to be cut on the spot and then fried into French fries. The process is very complicated, and potatoes are easy to deteriorate in hot summer, and the quality cannot be guaranteed. The company's chemist Rael. Dunlop invented the method of making frozen French fries. Simplott quickly commercialized it. Through cold chain transportation, the restaurant stores frozen French fries in the freezer and takes them out for frying when necessary. This new invention saves a lot of labor costs.
1967, Simlot met with Requero, the founder of McDonald's. The two sides shook hands and made peace, and finalized the century-old order for Simlot to supply frozen French fries exclusively to McDonald's. The cooperation with McDonald's has made Simplott's business grow rapidly. Today, Simplott provides frozen French fries to half of American fast food restaurants.
(Figure 4-16: Advertising by J.R. Simplot Company)
Another episode: McDonald's restaurant was founded by McDonald's brothers in California. They first started assembly line production, shortening the time for making hamburgers from ten minutes to one minute. RayCroc is a milkshake salesman outside Chicago. He obtained the right to open a chain store in the United States from the McDonald's brothers, which was a great success, and finally obtained all the rights and interests of McDonald's in turn. RayCroc is the founder of McDonald's Company. 20 16 TheFounder, a Hollywood blockbuster, was performed by michael keaton.
(Figure 4- 17: McDonald's founder Ray Crocker)
(Figure 4- 18: Michael Keaton's McDonald's Legend)
In 2004, J.R.Simplot was listed as the 59th largest private enterprise (unlisted company) in the world by Forbes magazine. In 2007, J.R.Simplot ranked 89th in Forbes magazine's list of American billionaires with a personal value of $3.6 billion.
Simplott died in 2008 at the age of 99. This year, the New York Mercantile Exchange's NYMEX, which once made him sad, was acquired by the Chicago Mercantile Exchange Group. It seems that he has the last laugh.
(Figure 4- 19: Simplott and McDonald's French fries)
After reading this article, will you order French fries at McDonald's today?