Ear on Chicago; There's Cash in Your Future: Chicago Board of Trade; Part 2

It is now 10 seconds before 9 .30 a .m. At exactly 9 .30, a bell will ring at the Chicago Board of Trade, and another day of trading will open. 7, 6, 5, 4, 3, 2, 1. We are standing on the visitor's gallery of the green pits at the Chicago Board of Trade. Today we are going to do the story of a transaction. Bert Logan, who is the Public Relations Director, is going to be our guide. Bert, before we go down on the floor, as I mentioned at the opening of the show, we're standing on the visitor's gallery. Now this morning we saw a group of students who came in to see what was going on here in the green market. There's a group of adult visitors here now. Now, actually to the layman, I'm sure that they don't quite understand everything.

There's a lot to see here at the green market. For example down here to our left, we see a large bank of blackboards with operators up there in tan jackets, riding down numbers. One of them, for example, is listening to a telephone. Now what's going on up there, Bert? Well, those are our board markers, posting the latest prices for various markets. Now most of those boards represent prices here at our own market, but you'll notice that we also post prices for markets in Minneapolis on other grains. We also post prices for markets for the market at Memphis on soybean oil and meal. We also post prices for the cotton markets in New York and New Orleans. All of those, all of that price information is of extreme interest to a trader here at the Chicago Board of Trade. Now for our own marker, those are the board markers off to the right there that you see. And incidentally, we have them here at the other end of the floor. They are getting price changes by Morse code.

You see that little machine there with the tape coming out. That's a Morse code ticker. And those men have been trained to translate those codes into price changes. And as soon as they hear the code that pertains to the commodity they're marking at that time, they will mark the changes. Now they get that information over Morse code by right off the trading floor. You see down in each of these pits there is a raised platform that we call the pulpit. And in that pulpit there are two men. One man is watching trading and every time a price changes, he writes it on a piece of paper, time stamps it and gives it to the man next to him. And the man next to him is operating a teletype machine. And he flashes by this teletype machine that price change back to a room behind the trading floor that we call quotation central from quotation central. This price change is relayed simultaneously by Morse code to the board markers and also by a quotations ticker all over the world so that everybody interested in grain

trading can get this price information within seconds after the transactions have been made. Above the Chicago cotton seed oil blackboard up there Bert a moment ago I saw I saw a red letter flashing at number 36. What did that mean? Well as you could appreciate you with all these people down here and with all this noise things get a little confusing at time. And so the management has tried to eliminate as much noise as possible. Now a lot of these traders will have incoming phone calls and they'll have visitors. That's just a quiet way of signaling them. They have a number and when their number flashes they'll go to one of these boots on the side of the floor and they can take their phone call or receive a message. On the far side of that blackboard before we leave that end of the room is Liverpool market. We all heard about the world grain market is that part of it? Well in the old days

back before the war you Liverpool used to be considered the world grain futures market especially on wheat. That's no longer true during the wheat during the war their market went out of operation. You cannot have a futures market in an economy that is not based on the free enterprise system. And as you know the English economy was pretty much socialized or it was controlled by the state. And so their market went out of operation during the war years. Bert let's move quickly and briefly now through the rest of the room just below the blackboards a large number of men are seated behind some desks over there. What happens there? Well those are telephones here and all of those are direct wire phones and they are connected with brokerage firms and offices here in the building most of them. And as the orders come in from branch offices and other places of these firms they are transmitted directly. You see speed is of great importance in the futures market everything has to be done with split second precision.

And so to make it as rapid as possible all of these firms have established direct wire phones and they hire these men to man the phones so that when an order comes in it can be relayed to them immediately and passed on into the trading pits where it could be completed. Now we finally reach the trading pits themselves. Physically they look like a large octagonal shaped wooden platforms. Actually they're not really pits they're more platforms but inside of those platforms is a hole and there are one two three four steps up and four five steps down. Now that's where the trading really happens isn't it Bert? That's where the trading in the futures market happens yes and the shape and design of these pits was done with one thing in mind and that was to make it possible for all traders to see all other traders at any given moment in the pits so if you were standing on let's say the south end of one of these pits and you wanted to do business with somebody on

the north end in other words the opposite side you would be able to see him you would be able to see his signals indicating that he was interested in buying or selling and if you wanted to take the other side of that trade you could do so. Now we've reached the right side of the room of the far end to our right and up above that end of the room is another bank of blackboards is this just a duplicate of the one at the left? Yes that's a duplicate view and the reason for it is as you can see this is such a large room that if a man is standing on one end of the room he wouldn't be able to see the board unless he had extra special eyesight actually you can put a five story building into this trading floor and never touch the sides. Now Bert there's one thing I want to mention before we finished the description of the room we hear a lot of voices down here but that isn't all we actually see what's going on each individual member in the pit is holding up a hand four fingers or two or three or one or

closed fist what is all that mean? First of all let me point this out this is a public market that means that all transactions must be done publicly you can only trade in the futures market between the hours of 930 and 115 for grains you must announce publicly and the rules specifically state by public outcry exactly what trades you want to make if you want to buy you you shout an offer or a bid to buy if you want to sell you shout an offer to sell at times and especially in a busy market the noise would be so great that you may not be able to hear an individual shouting a bid or an offer unless he had a pretty husky voice so they supplement those voice bids and offers with hand signals and if they are pointing if their palm points outward they are selling they're pushing it away if their palm points inward they are buying they're bringing it to them

and the fingers bird what about those for example one man out there has four fingers flashing well that's that's another part of the signal you the fingers if they are held when held in a vertical position represent the number of bushels each finger signifies 5 ,000 bushels so if you have one finger vertically it's 5 ,000 to 10 ,000 on up the horizontal position of the fingers represents price and you'll notice the blackboards carry the last full cent price of each commodity so when you want to indicate the price at which you're willing to buy or sell you do that with a finger and there each finger represents one eighth of a cent now bird one other thing down here towards the right side towards this end of the building near to where we're standing is a large weather map why do you have a weather map at the board of trade the weather map is a source of great interest to all grain traders as you know grain prices generally are based on supply and demand factors

and the the greatest factor influencing supply is the weather if you have good weather good growing conditions you're going to have a larger supply if you have poor weather poor growing conditions you're going to have a smaller supply now at the moment the growing season is not in full force except in the winter wheat area so the weather map does not attract the attention today that it will say let's let's say next June or July and at that time then people are interested in knowing how hot it is how much rainfall there is and that weather map is kept up to date on an hourly basis so that if you were a trader on this floor you could step over that map and know just what's happening weather wise in Texas north Dakota or wherever you happen to area you happen to be interested in what about the prices that's a trans luxe machine that's a convenience many commodity traders are also interested in securities and that particular ticker over there represents security prices on the the New York stock exchange

well I think we've pretty much described the scene here birth at the grain market suppose we go down on the floor and start with our transaction in this market fine you know let's go we're standing on the floor of the trading floor of the Chicago board of trade and that noise you hear in the background is the sound of trading going on last week we talked about the cash grain and today we're going to talk about the futures market now we're going to talk to Bill Binden Agle first of all a vice president of the Glidden Company bill last week we were talking about cash market today we're going to talk about futures and you mentioned something about hedging now would you tell us exactly what you meant by that and then we're going to follow that process hedging is a means of reducing

losses on inventories due to market fluctuations as we buy cash beans from the country we normally sell a future for delivery 30 60 days from now in order to reduce our losses if the market should go down now bill your bot as I understand at 25 ,000 bushels of soybeans at eight under the May price that means eight sets under the May price is that correct yes we bought we bought the beans at eight under the May price crack country station those beans will be shipped to Chicago and will eventually be delivered to our plant for processing and when you sell or hedge what kind of a price are you going to try and get we are going to try to get the price on which we based our purchase for instance if the may beans were at two sixty five when we made our

purchase we would try to get two sixty five for our hedge you would break even on that's a transaction yes and protect yourself and protect ourselves from losses I understand all right now what what will you you will have a conversation as you did last week with Bob Schultz is that right and Bob is standing right here we might as well listen as you instruct him as to what he's going to do yes when Bob and I discussed buying the soybeans we decided that we would sell may beans as we bought the cash soybeans why may beans we prefer to sell may beans because that is the future which is the nearest buy we are now trading in May July September and November beans at the Chicago border trade but for hedge purposes we prefer to sell the the nearest buy future month now that you have bought your cash beans let's get the hedge sold to protect ourselves and loss okay as I

put the order in at the market yes let's sell the twenty five may beans at the market all right now you heard Bill tell Bob and giving him that order to sell and we're going to ask Bob I notice he's writing something down on a piece of paper Bob what are you doing I'm writing an order to give to my broker to sell twenty five may beans at the market we're here at the pit I'm giving the order to Iver Brooke who will fill the order in the pit Iver can we listen to you as you go through the transaction yes but let's go around to the main side where they trade well trade primer of the May future all right as well we're walking around this octagonal shaped pit down we're going to go over here where Iver is going to handle his transaction if we have enough cable here we're walking right up on top of the pit now twenty five eighty dollars and the transaction

was made at two sixty four and a half and now I will check the trade as made with the other brokers or at this price twenty five twenty five twenty five and six and four and I did nothing with you twenty five the name that he gave me as the name of the company which bought the soybean which bought the soybean futures which company was that BB Denison in company right okay Iver thanks a million now you've actually heard a transaction made in the pit the soybean pit at the Chicago board of trade now Bob we heard the transaction in there we heard your soybeans being sold but actually was a jumble of words Iver was yelling at somebody and somebody was yelling at him I suppose you explained to me just exactly what happened well Iver went into the pit and offered offered our order at three quarters it was a half bid and the order was completed at two dollars sixty four and

one half cents a bushel he offered it at two dollars sixty four and three quarters since yes somebody bid two dollars sixty four and a half cents that's correct and he sold it at that price yes but that is not exactly the price that you wanted or is it no it isn't but that was the market at the time and my order was to sell at the market so you have to accept that price yes I do I understand all right now Bill what happens between now and the time when these soybeans arrive in Chicago and are eventually delivered to our plant we will try to find buyers for the soybean meal and the soybean oil we will sell the soybean oil to refiner or to exporters we will try to sell the soybean meal to a mixed -feed manufacturer when we find buyers for these products we will then place an order in the pit to buy twenty five Chicago May soybeans in order to lift

our head and that's complete the transaction twenty five Chicago May soybeans twenty five thousand bushels twenty five thousand bushels now let's get back to our guide Bert Logan Bert we just watched the Glidden Company make a sale transaction here in the soybean pit on the futures market now how can they go into the pit at any time of the day and make such a transaction well now you were back again to that point I made earlier that you have two separate and distinct groups that use this futures market one group as I mentioned are what we call the hedgers they are people who are trying to avoid risks and they're using the futures market for that purpose the other group are those people using the futures markets because they want to take risks that's their business they're what we call the speculators and in order to have a well -functioning futures market you have must have present in the market at all times a pretty good balance between the hedgers and the speculators in other words a balance in the volume of

trading between people trying to avoid risk and people who are willing to take risk because they have studied market conditions and they think that they know what price trends will be as you can see there are several hundred people on this trading floor these are all specialists these men all are familiar with market conditions they know supply and demand factors and I would guess you that if we called ten of them over here and we said that you think soybean prices are going up or down we'd find probably five of them would say prices were going up five of them would say prices were going down even though they had used the same they have access to the same facts they just interpret them differently bird one final question before we leave this subject all of this apparent confusion certainly explainable to anybody on the floor but from watching it from the visitors gallery why you don't really understand it but may I ask you this question is it really boils

down to there's a buyer and there's a seller down there in the floor and they are establishing the price on a bushel of wheat that that substantially is is true you for every bought contract there must be a sold contract you must have two sides to every trade this is a world market this market reflects all of the supply and demand factors not only for the United States but for other countries as well for instance in soybeans the last few weeks the prices of soybeans have been going up the reason for that is the few recall your weather reports of about a month or so ago they had a very severe winter in real cold weather in Europe that cold weather froze out and damaged and destroyed much of the olive crop by destroying the olive crop they diminished the supply or the projected supply of olive oil soy soy beans one of the principal ingredients of soybeans of soybean oil and soybean oil and olive oil can be interchanged

in in many processing uses and consequently the the relative small supply of olive oil has tended to make the demand for soybean oil greater and consequently when your demand has gone up the prices have gone up with that demand but we've seen a lot of transaction here in the pits what happens to those transactions now that they're completed well in the futures market they are dealing you in contracts and a contract can be consummated or completed in a futures market in either one of two ways you must either make or take a delivery of actual cash grain or if you prefer not to make or take a delivery you can offset your position by making another transaction of an equal amount in just the reverse of what you had for instance let's say you went long or bought 5 ,000 bushels of soybeans if you want to complete that transaction

by taking delivery you would just hold that contract pass the expiration date of the contract month and some short then would have to deliver 5 ,000 bushels of soybeans to you now let's assume that you did not care to take delivery on these soybeans then you would offset your long position by making a sale of another contract of 5 ,000 bushels so that your net position would be even we are now in the office of mr. Robert C. Lieber now executive secretary of the Chicago Board of Trade Bob we've just had a tour of the Chicago Board of Trade and a couple of transactions we've certainly enjoyed our trip and we want to thank Bert Loken and his staff for all the cooperation that they've shown us well thank you very much you we certainly appreciate your remarks we also appreciate very much you're taking the time and trouble to come over here working with you has also been very pleasant Bob we would like to have a few closing remarks from you concerning the operation here at the Chicago

Board of Trade one of the more interesting things I think that I have noticed is the fact that in the corn pit and in the wheat pit activity is somewhat lessened from what it was oh perhaps 10 or 15 years ago why is this that's directly attributable to the government's intervention in the grain marketing business we might say he'll statistics will definitely show that as the government's acquisition of farm commodities continues to grow the trade at the Chicago Board of Trade of course continues to dwindle it can't help but work any other way the government themselves of course do not hedge they don't have to because they have the taxpayers funds with which they can protect the price insurance of their inventory it's only in the free market where of course hedging is used so it's directly attributable to the farm program to the government intervention the business that we've seen the last 20 years well of course this is harmful isn't to the Chicago Board of Trade and its members well it's not only harmful to the Chicago Board of Trade and its members but it's harmful to the American people both the farmer and the

consumer as well I don't think there's any question but no one has yet been able to divide is a better system for marketing agricultural commodities and what we have right here and if someone disrupts or damages a system there will be some difficulty of course in trying to get it back into running shape again so it not only damages the board but we like to think that it damages both the farmer and the consumer well Bob R tour a deal mostly dealt mostly I'm gonna start head over Bob R tour dealt mostly with soybeans and we carried through a transaction and it was very interesting to see that the soybeans has a much happier state of affairs than does corn or wheat this is something brand new too is it not yes it is a soybean is really a wonderful thing it's a wonderful story you I don't know whether you realize that or not the soybean itself only has three uses the first of which is for planting the second of which is for export and the third of which is for processing there are some 100 different products

that are derived from the soybean as a matter of fact in the last 20 years the soybean production has increased some 70 to 75 times I believe about 20 years ago in 1933 the amount of soybeans that were grown was approximately 5 million bushel today we will see about 375 to 380 million bushel soybeans grown and approximately 25 to 30 % of those are grown right here in the state of Illinois we're just going to say it's a great boon for farmers but especially in Illinois because as I understand it Illinois is one of the largest producers of soybeans is that true yes it is there's no question about it here I saw some statistics on it here very recently there's around 90 million bushel of soy beans that were grown the state of Illinois alone back at that time the cash price for beans was approximately three dollars a bushel so we can say that the soy bean brought some 270 million dollars of income to the farmers of the state alone which of course is a nice tidy chunk of money

well for the general public that listens to this program I am sure that one of the questions that comes to mind is this should I should John Q public get into the cash grain market into the cash grain market you would perhaps be more interested in getting into the futures market rather than the cash grain although there is speculation and speculating on cash grain both of your speculating which you would be doing you would be in the futures market in other words if you were on the trade if you wanted to take a position in the market trading speculating is something that should be done only by people who can't afford it and I think perhaps you can answer the question better yourself as to whether you should trade I suppose you should be loaded in order to get in with these experts I wouldn't say that you should be loaded and I would certainly say that all the people that are in there are not experts but whenever you are using some of your risk capital in a venture such a speculation you also should be prepared of course that you could incur some losses in other words let's put it another way if trading trading in commodities trading in stocks if there was any guarantee that one could make a tremendous sums of money

memberships in these various commodity markets and these various stock exchanges would not be selling at the prices for what they were and they would not always be available for sale you see because there would be such a tremendous demand no one would want in if it was a guaranteed and the key which opens the door to newfound wealth. Bob what do you see for the future of Chicago Board of Trade? Well the future of the Chicago Board of Trade rests directly in the hands of the United States government if the government decides if Congress decides perhaps I should use the word Congress as opposed to the government if Congress decides that they are going to have a more realistic attitude toward a farm program if they are going to get the government out of the grain business if they are going to come up with a farm program that will halt the activities of the government as they are in contravention to the activities of the Board of Trade if they're going to come up with a farm program by which the government will stop competing

with people in the free trade of course the the future of the Chicago Board of Trade is unlimited but with the St. Lawrence C -way coming into being here in Chicago what with a tremendous expanse in our population but with more efficient methods being used to raise our agricultural commodities if this marketing machinery is left untouched and undamaged the Board of Trade can't help but have a tremendous future if we're going to instead go down a trail of socialism of communism well the future is most bleak in my own personal opinion. Bob we want to thank you very much for talking to us and again thank you for allowing us to take its tour of the Chicago Board of Trade. You will hope you come back sooner and often. Thank you.