The Boys in the Pits
Bare-knuckled capitalism on LaSalle Street
July 5, 1985
The trading pits on LaSalle Street are mostly idle these days, but in their heyday tourists on their Chicago trip used to pile into the visitors gallery to watch, the way they stood to watch the running of the bulls when they stopped at Pamplona. The spectacle was much the same.
Reviewed: The New Gatsbys: Fortunes and Misfortunes of Commodities Traders by Bob Tamarkin, William Morrow & Company, 1985
Jeffrey Greenberg is five feet, five inches tall, a gold trader who once had his nose broken during the frenzy of a trading session at Chicago’s Mid American Exchange. Recalling the injury, Greenberg told reporter Bob Tamarkin that he hadn't noticed who'd flattened his hooter, indeed that he didn't even know it was broken until he left the floor. Reading Tamarkin's new book, The New Gatsbys: Fortunes and Misfortunes of Commodity Traders, it becomes clear whodunit: it was the invisible hand of Adam Smith.
Tamarkin—formerly a reporter for the Chicago Daily News, the Wall Street Journal, and Forbes magazine—gathered stories like this from nearly 200 of Greenberg's fellow traders. He talked to winners and losers, and some who haven't yet figured out the difference, all of them denizens of the trading pits where, it is said, you can find more millionaires per square foot than in even an NBA huddle.
Gatsbys is a hell of a story, absorbing and appalling in turn. In it you find Richard Dennis, the "Prince of the Pits" and liberal-cause donor. Gary the Bug, the cocoa speculator who charts the career of the bean-eating mealybug the way a hypochondriac charts his blood pressure, is also here, as is Leo Melamed, a chairman of "the Merc" whom an associate described as the only man he knew who could pass you in a revolving door after you'd stepped in first. And there is Jack Sandner, a former boxer who turned a $1.2-million disaster into a profit in the cattle pits in one extraordinary day. Tamarkin shows us dozens more, some who left the pits rich, others who left broke, divorced, crazy, even dead.
In the pits, as in few other professions, who you are is revealed by what you do. There is a rough democracy on the trading floors, but whatever their differences of class, sex, or race, the traders share a lust for chance. Futures trading is less a business than a game. The distinction drawn by exchange officials between gambling in its familiar forms and trading in commodities futures—speculating on the rise or fall of the price for everything from pigs' bellies to gold bars—is not very convincing. Tamarkin is hardly the first writer to point out that the urge to speculate is a universal human vice. The impulse may be universal, but the dash, the brio, the impetuosity with which Chicagoans have always gone about it sets them apart. What the casinos are to Vegas, the big commodity exchanges are to Chicago. The exchanges comprise a major local industry—roughly 85 percent of all the action in commodity futures is handled by the Chicago Board of Trade and the Chicago Mercantile Exchange—and the city's principal claim to the world's attention. "In commodities," Tamarkin boasts, Chicago is "no Second City."
Chicago's speculative ambitions have always been indiscriminate. Emmett Dedmon suggested in his Fabulous Chicago, for instance, that the ease with which fortunes could be made in the sale of city lots before the Civil War curbed the crime rate by diverting felons from less lucrative swindles—one of the few circumstances in which real estate development may be said to have been socially constructive.
It was still the trading pits that excited the ambitions of generations of old Gatsbys. The city and the exchanges grew up together. (The Board of Trade opened in 1848.) What geography had endowed, tradition quickly ordained. Tamarkin insists that today's traders, with their "single-minded penchant for the big play," constitute a "new breed" of speculator. While it is true that many of the baby boomers make their killings in exotic new "commodities" like T-bills and foreign currencies, big players did not have to await the invention of the stock option index future.
As early as the 1860s, it is said, professional card sharps saw their tables forsaken for the pits. "There was no reason to risk a stake at cards," wrote Dedmon, "when anyone who enjoyed 'skinning a sucker' could wander down to the . . . Board of Trade where he could find any number of similarly minded individuals willing to match wits with him." And in the 1880s, traders perfected the art of cornering grain markets; one of the more accomplished of such swindlers was Benjamin P. Hutchinson, who in 1888 ran his winnings up to the then almost unimaginable sum of $10 million.
The music of fortunes being made sounded sweet to store clerks and shopkeepers as well as their betters. Public demand for a piece of the action in the 1880s spawned the "bucket shops"—parlors in which the little guy could make wagers on the swings of commodity prices clacking off the telegraph wire from the Board of Trade. The bucket shops operated with none of the impediments required of traders by the board. You could trade in smaller lots, usually without paying a commission, and you were relieved of the largely ritual obligation to actually receive or deliver grain.
The trading pits provided all sorts of speculative enterprises with both a model and moral justification. A professional horseplayer once formed auction pools to bet on races in the same way that traders formed pools to bet on wheat prices. (Wheat, apparently, ran faster.) The lessons of the pits also were applied by their masters to speculations in more exalted commodities, with similar success. The Art Institute was filled by men who bought paintings in Europe the way they bought hogs on the exchange floors. One such expedition took place in 1890, when Art Institute president Charles Hutchinson (son of Benjamin) went long on Rembrandts during a European spree, bidding high and bidding early, trading in volume.
Chicago's commodity capitalists have always made and spent their fortunes unbothered by conscience. To traders in the early years, the most ruthless plots to corner markets were less attempts to defraud than the flexing of a more virile ambition. Chicago's greed, they argued, was untainted by the seamy scheming of the eastern capitalists. In his useful history The Chicago Board of Trade 1859–1905, Jonathan Lurie recalled some remarks of Benjamin Hutchinson. "The field is open to all," proclaimed this honest highwayman, boasting that in the west monopolists were made—rather made themselves—and not born. Speaking of his own career, Hutchinson said, "I have issued no spurious stock certificates, stolen no railroads, joined no gold conspiracy. For a study of such type of 'ethics' I would respectfully invite your attention to the gentlemen of Wall Street."
This taunt of "Old Hutch" will be recognized as yet another variation on the familiar theme of western vitality versus eastern corruption. (Incidentally, Tamarkin tells us that Old Hutch went bust and spent his last years running a secondhand store in lower Manhattan, from which spot he could study the ethics of Wall Street more conveniently.) The disdain with which Wall Street regards what Tamarkin calls "the brash LaSalle Street style" is not wholly undeserved. This is partly a matter of scale; they trade corn on the Merc, conglomerates on Wall Street. It is partly a matter of taste; it is hard to imagine brokers on the stock exchange spending their off hours bent in $20-a-throw coin-toss games the way some of Tamarkin's traders do, or cashing their commission checks to buy home toilet seats made of Plexiglas studded with Krugerrands.
After 140 years, in short, the commodity exchanges remain ineluctably Midwestern. Traders still come mostly from the Midwest, especially Chicago. (Until 1925 you had to live in Chicago in order to buy a seat on the Board of Trade.) Those who graduate from college carry degrees from Roosevelt, DePaul, Notre Dame, or one of the Big Ten, not Harvard Business. Their relative lack of education is not regarded as an impediment; as one successful trader put it to Tamarkin, trading is 98 percent emotion and only two percent brains. The pits remain as egalitarian as they were in Old Hutch's day, and prizefighters stand toe to toe with philosophy majors.
What does seem distinctive about today's traders is their youth. Trading is a high-stakes game to be sure, but is still a game, and games are for kids. It is interesting to note the ways that traders depend on the emotional certainties of life in the pits. It's a simple, black-and-white world unconfused by grown-up ambiguities; as more than one trader confessed to Tamarkin, you know where you stand at the end of the day. (Of the many metaphors that have been concocted to describe the pit—and The New Gatsbys is a veritable lexicon of them— the most apt may be the sandbox.) Traders tend to quit while still young. The physical strain takes its toll, obviously. But Tamarkin adds that by their 30s and early 40s traders acquire too many financial commitments. They trade futures for a future, in other words, for houses and kids and trust funds. They grow up.
About the ultimate source of what he calls the traders' "dedicated selfishness," Tamarkin adds little. They are not scrambling against want; most came from comfortable middle-class backgrounds. Tamarkin ventures that they "want to forget their troubles . . . and concentrate on living high," but he never explains what kinds of troubles these privileged children of the 1960s might have to forget. Their deprivation seems to be psychic. The stakes in the futures game, it appears, are emotional as well as financial; money is just how you keep score. Said one trader, "It is far more important to know what Freud thinks about death wishes than about what Milton Friedman thinks about deficit spending."
Old-fashioned greed is a motive, certainly, but traders seldom show greed for money alone. There is greed for ego gratification; Tamarkin speaks of their "indomitable need to be right." The greed for sensation seems just as vital. Lurie's statement from the 1890 memoir of a Chicago gambler could have come from the mouth of almost any of Tamarkin's subjects. "Life is restless," the gambler wrote, "and we can find recreation only in excitement." The social pathology of the 19th century has become the life-style of the 20th. Boredom is the leitmotiv of the baby-boom generation, after all, and one of the attractions of betting is that for most people it endows the future with a significance it might not otherwise seem to have.
The more money you have, apparently, the less it's worth. Spending causes some traders more problems than making it. (One trader claimed he drops 30 grand a year greasing the palms of traffic cops and maitre d's—an estimate the skeptical reader may dismiss as a species of pit bull.) According to Tamarkin, traders live in a "sort of parallel world that mimics the forms of upper-class reality." If Tamarkin's description is any guide, that world is further proof that money and class are not cause and effect. The lives of these "ultimate consumers" often veer toward parody. The Rolls Corniches and the $100 cab tips are less upper class than what the acquisitive middle class imagines upper class to be. Readers may dispute the proportions, if not the broader truth, of Tamarkin's claim that traders' retreats like suburban Burr Ridge contain a walnut-paneled library for every media room with Ultrasuede walls. Tamarkin does not reveal what those libraries contain, but it seems safe to assume that many of our heroes buy their books the way they buy their boats—by the foot.
In the end, though, it is the ways the traders make their money that fascinates, not how they spend it. Tamarkin does a passable job of unveiling its secrets to the uninitiated. He explains the differences between position traders and scalpers, spreaders, and hedgers, fundamentalists and chartists. He explains the effects on the markets of the Russian grain deal of 1972, the "great grain robbery" which left traders "reading the USDA Hogs and Pigs Report as if it were Valley of the Dolls." He explains the expansion in the 1970s of trading in so-called "intangible" commodities like stock-index options.
About the larger controversies that have dogged the exchanges over the years, Tamarkin has less to say. The exchanges have been suffered by dubious authorities for 140 years because they are believed to serve a public purpose. The central premise of capitalism, which is that individual interest, expressed collectively, achieves a common good, is made manifest in the pits, where greed is rendered as virtue by the alchemy of the marketplace.
Exchange officials from the beginning have insisted that it is the market forces that ultimately set prices, and that the trading in the pits merely reflects them. Without futures trading to stabilize the seasonal ebb and flow of goods through the economy, farmers and consumers alike would be pummeled by cycles of glut and scarcity. What has always been true of corn has lately become true of capital as well, as money markets have been buffeted by their own storms and droughts, in the form of inflation, devaluations, and so on.
The problem is that greed is only haphazardly harnessed on the exchanges. Judges, congressional investigators, federal regulators, even the directors of the exchanges themselves have always found more to deplore about trading practices than there was to reform. Tamarkin suggests that cheating of one kind or other is widespread but hard to detect. Nor are all the price distortions the result of conscious manipulation. Supply and demand rule the pits, yes, but so do fear, and the herd instinct. (It is interesting to note how many of the younger traders studied psychology in college instead of economics.)
There is an inherent tension between an individual trader's need for speculative license and the market's collective need for efficiency and stability. Resolving that tension too completely in favor of either license or stability, goes the argument, would destroy the exchanges. (Often in the past, abuses have been eliminated by making them legal, as was done with once-outlawed options trading.) Tamarkin suggests in passing that, for all its abuses, trading in the pits is a better way to set prices than the alternative, which is government fiat.
Gatsbys is no economist's treatise, however, but a reporter's story. Tamarkin has the practiced journalist's eye for the telling detail; an economist would have rejected as irrelevant the fact that a cigar shop in the Board of Trade building now sells gold jewelry as a sideline. His accounts of the pits themselves are especially vivid. We learn that flu epidemics are common, and that traders who forget themselves in the heat of the moment and punch a colleague are levied a $3,000 fine. We learn too that a trader's bark is worth more to him than his bite. The din of the pits makes a trader's voice valuable. (And vulnerable; a few take opera voice training to strengthen theirs.) Traders often can't hear each other, with the result that orders to buy and sell are misunderstood. Such "outtrades" can cost tens of thousands of dollars, but the traders' code demands that they be honored. (By the way, the percentage of dishonorable traders probably is no higher than the percentage of crooked defense contractors or siding salesmen, but they do exist. Traders who lose a big gamble and flee their debts are said to play the O'Hare spread: "Sell Chicago; buy Mexico.")
Occasionally, Tamarkin's prose suffers from its own kind of frenzy. There are jarring instances of garbled idiom ("Whenever the world sneezes, the traders blow their noses") and outright errors of language (sweat is said to "drivel" down a jogger's legs). Years of being asked by editors to liven up dull stories about commodities trading have led to runaway metaphorizing. (The exchanges are said to have "lured modern day prospectors who descended on the pits like battalions of boll weevils on a gourmet tour of a cotton plantation.") Tamarkin's stories survive his sometimes clumsy telling of them, however, and when those stories are told well—the extended profile of cattle trader Jack Sandner comes to mind—they are told very well.
For the most part Tamarkin leaves readers to tease their own morals from his accounts. One of the book's satisfactions is the pleasure of seeing ancient lessons affirmed. Money really doesn't buy happiness. The recurring motifs of the traders' lives off the floor are wealth without value and consumption without pleasure. Gatsbys is not a systematic survey, and its conclusions may be discounted proportionately. But even allowing for the inevitable pull of journalism toward the outlandish, the pathetic, the violent, the book's conclusions seem sound enough: Wealth is complicating. Sudden wealth is disorienting. Sudden wealth that comes when you are young can be disintegrating.
These lessons are unlikely to cool the allure of the pits. Where else (aside from the obvious exception of presidential memoirs) can fortunes be made with no training and only a little luck? Where else can the ambitious swindle each other without fear of a grand jury? A city that swallowed Al Capone whole will not gag on a few hundred compulsive bettors whose felonies against both taste and the state are so innocuous as to be endearing. Tamarkin at one point describes the exchanges as a parody of the American dream. He has it wrong. The dream —in the nakedness of its greed and the power of its nightmare—is felt most purely in the pits. ●