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$
J
.,s
g
You
can
Get
FabulouslyRich
as
a
Floor
Trader-Right?
A
lofula1rytht
Allfloor
localsare
rirh
beyond,
belief.
They
driae
Porsches,
liae
in
sechtd,ed,
suburban
mansions,
and
employ
French
maids.
The
first
in
aseries
ByJ.T.Sumner
Tl.
furrher.
people
live
away
I
trom
atrading
cenrer.
rhe
L
morestronglythey
seemtobelieve
in
the
-ytli
ihut
tirere
is
nofasterwaytoriches
thanbecoming
a
trader
ona
furures
or
options
&-
change
floor.Theybelievethat
floor
tradersconspire
to
determine
the
price
of
the
pirricular
market
andall
benefit,
while
the
public
and
com-mercial
users
lose.
-
If
thiswere
so,
then
floor
traders
as
awhole
wouldindeed
be
a
vervwealthy
crowd.
A
fewtremendouslysuccessfulones
are-as
are
a
few
very
successful
people
in
virtuallyevery
business.
The
fantasv
abour
fabulously
rich
traders
does
have
some
elements
of
fact.
In
realitv.
some
get
rich
whileothers
stay
pooror
go
broke.Meanwhile,
a
new
flock
o.f
the
pu-blic
isushered
in
through
therevolvingdoor,
luted
by
tf,e
promise
of
big
money.
There'ssomething
else,
too.
It's
the
excitement,
the
pressure,
the
camaraderie
of
a tiuhtly-knit
club
where
almost.ro
otr.Elr.
knowshowto
dowhattradersdo.
But
there
arealso
drawbacksandabsurdities.
Floor
trading
can
bea
real
slaush_
ter
for
beginners,dreamers
a*nd
Courtesyof theChicagoBoard,
of
Tiad,e
complainers.
Upton
Sinclairmisht
bemoved
to write
abour
thefl6or
were
he
to
return
to
Chicago
to
see
wharhasreplaced
rhe
turi-of_the-
century
slaughterhouses
he
de_
scribed
so
vividly
inTheJungte.
BARRIERSTO
ENTRY
Decidin-gto
trade
as
an
independentonthe
floor
is
essentially
going
intobusiness
for
yourself.'
the
"floo,
trader
is
theultimate
capitalist.Heproduces
no
product.
In
making
a
market
for
<lutside
hedgers
a"nd
speculators.
he
is
entirely
willing
to
risk
his
personal
fortune
to
makj
aneven
bigger
one,
or
lose
what
hehas.
He
receives
no
salary,
no
benefits.
TheWorldwide
Futuresand
Options
Report
$250,000.Many
exchanges
offer
partial
memberships
initially
priced
at
up
to
$50,000,
to
stimulate
tradingin
new markets.
If
one
doesn't
have
the
capital
to
purchase
a
seat
out-
right,-he
can
lease.
A
$250'000
mEmbership,
for
starters,can
lease
for
up
to$3,000
or
so a
month,but
a
partial
membershiP
maY
run
at
iround
$400
amonth,
rarelY
less.
Quarterly
exchange
duesmust
be
added
in
nearly
all
cases,
and
these
run
at
$500,
for
examPle,
for
a
Chicago
Board
ofTrade
government
Background
doesn't
countfor
rnuch,
sincethere
is
no
comParable
Iine
of
work,
andno
Place
to
learn
the
job
but
the
Pit.
His remuneration
dependsentirely
on
his
dailyperformance.
Sinceno
backgroundin trading
or
business
is
required,
aspiring
locals
come
fromall
walks
of
life:
ex-
advertisingand
ex-salespeople,
ex-
cops,
in
fact,
ex-everYthing.The
story
goes
that
onelegendary
trad-er
is
a
iormer
Chicago
policeman
who
used to
walk
a
beat
around
the
Board
of
Tiade
building,
gotcurious
one
day aboutwhat
was
hapPeningin-
side,
and
never
came
out.Othersin-
clude
former
football
players,
den-
tists,
stockbrokers,
journalists
and
those
who
started
outon
the flooritself
as
clerksand
runners.
Educa-
tion
levels
range
from
PhDs
and
MBAs
to
high
schooldroPouts.
Backgrounddoesn'tcount
for
much,
since
there
is
no
comParable
type
of
work,
andno
other
Place
to
learn
the
job
but
the
pit.
BesideJ
a
cleanlegalhistorYand
a
record
of
financial
stability,
theonlyrequirement
for
the
beginning
local,iust
like
any
entrepreneur,
lsmoney.
buidelines
are
beginningto
emerge
within
the
exchanges
about
how
muchoneshould
have,
but
what
constitutes
sufficientcapitalization
is
anybody's
guess.
It
depends
o,n
th_e
individual,
his existing
overhead,
andhis
talents.
Is
he
disciPlined,
good
withnumbers,
physicallY
fit?
A
dozen
indefinite
factorsenter.
Thefirst
decision
such
a
beginner
makes
is
whether
to
buY
or
lease
a
seat.
Full
seats
atthe
major
ex-
changes
cancostuPwards
of
instruments
membership
(GIM)
which
allows
one
to
trade
contracts
in
U.S,
Tieasury
notes
andbonds.
If
a seatis
purchased,the
trader
is
partially
set,since
the
seat
can
be
used as'collateral.
If
one
has
to
lease
a seat,
things
are
morecomplicated.
Since
there
is
no
guarantee
how
the
individual
will
perform
in
trading,
nearly
all
firms,
and
some
ex-
changes,
now
require
a
$25,000
cash
or liquid
securities
deposit
bemade
with
ihe
trader'sclearing
firm.
This
money
is
held
to
guarantee
the local's
trades.
In
the
face
of
volatile
mar-
kets. disastrous
losses
for
anindi-
vidual
maymeanbad
debts
for
the
firm
andin
a
worst-case
situation,in-
stability
for
the exchange.
This
new
regulation,
a
necessitY
in
truth.
mav
often
be
ahard
nut
to
crack
for
ihose
without
financial
re-sources,
as
well
as
therunners
and
floor
clerkswho
have
worked
faith-fully
for
yearsjust
for
the
privilegeto
trade.
Thesepeoplemake
next
to
no-
thing,
have
little
in
borrowing
power'
and
no
influence
to
obtaina
bank
loan.
Banks
won't
make
unsecuredloans
for
seats
and
trading
since
the
prospect
is
iudged
to
involve
too
much
risk.The-only
solutionis
to
borrow
from
famiiy,
friends,
or
someone
who'salready
traded
suc-
cessfully.
No
one
else
would
feel
Courtesy
of
tlu
Chicago
Boardof
Tiod'e
44
INTE
RM
ARKET
I
December
I
984
secure
aboutthe
likelihood of
beingrepaid
within
this century.Onrare
occasions
firmswill put
upa
portion
of
the
$25,000,generally
takingfunds
out
of
their
workingcapital.
This
situationis
highly
un-usual, anddone
only
when
the
per-sonis
known,
respected
and
judged
verycapable.
Beyond
the
entry
cost,
the
properly-capitalized
beginner
should
have
enough
savingsto lastatleast
a
year
without earning anything
from
trading.
During
this
first
year,
trading
losses
can
add
up
to
a
sig-
nificantamount-$5000
to
$10,000
is
not
unrealistic.
It
can
be
much
more
if
the trader
is
reckless,
al-
though
it's
then unlikely
he
will
last
a
year.
More than
80%
nevermake
it
past
the
one-year
mark, and
many
"blow
out" in the
first
few
months.
If
the beginner
survives
thel2-month
gauntlet,
the
chances
of calling
this
a
paying
professionconsiderably
in-
crease.
TRANSACTING
BUSINESS
The
relationship
between
locals
and
brokers
(those
who
fill
customer and
institutionalorders)
generates
a lot
.
of
controversy
amongthose
re-
moved
from
theexchange
floor.
For
a local,the
broker
is
like
an
unclewho
candispense
silver
dollars
year-round.
The
customerorderscontrolled
by
brokers
are
the
lifeline
for
many
locals, so
once
they
cansecurea place
near them,
the
locals
neverstray
very
far.
A
note
ontrading
mechanics
shows
why:
Whatever
appears
on
a
quote
screen
only
representsthe
last
trade.
In
reality, the market
is
never
at
x;
it
is
always
bid
at
x,
offered
at
y.
For instance,the
U.S.Ti"easury
bond
Courtesy
of
the
Chi.cago
Board'
ofTiade
futures
mayhave
last
traded at
65-5132.
The
market
isatthis
pointeither
65-4132
bid
and
65-5132
of-
fered,
or
65-5132
bid and
65-6132
of-
fered.Obviously, everyonewants
to
buy
low at the
bid,
and
sell
high
at
the
offer.
However,
the
floor
broker's
primary
job
is
to
get
customer
orders
If
the
beginner
sur-uiaes
thefirst
12
months,
the
chances
of
calling
this a
paying
profession
,l
conscaerary
L\
?,ncre
ase,
/
filled
fast
and efficientlv.
To
do
this.
he is
often
willingto
'igive
up
theedge,"
the
edge
meaning
to
buy
atthe
bid or
sell at
the
offer.
This
is
the
beginning
to
under-
standing the
secret
behind whyskill-
ful
locals
can
amass
a
fortune
with-
out
having
to
know(or
care)which
way
the market
is
headed.
The
localwho tradesconsistently
with
a
brokergets
this
edge
regularly.
On
one
order
of
bond
futures,
this
one-tic
(1132
of
a
point)
edge means
$31.25.
On
a
l00-contractorder, you
can
figure out
what
it
means
for
your-
self.
Considerable discussion
on
the
floor
is
givento
broker
favoritism
of
hand-picked
locals
when
filling
or-ders.
Certainly
this
is
true, and
also
unfair in
some cases.
Broker
favoritism
can
be
understood
at ceF
tain
times
because
brokersare
ulti-mately
responsible
for
getting
or-
ders
filled.
Totrade
with
someone
who is unknown
or
inexperienced
can cost
a
lot of
money.
It'snotin
the
broker's
best
interest.
All
brokers areadmittedly
hesi-
tant
to
trade
with
a
novice
since
it
is
so easy
for
the
novice
to
misrecord
the
transaction price,
or
worse
yet,
the
quantity.
This
leads
to
an
outtrade-anerror
which
prevents
the two
sides,
buy and
sell, from
matching up
the
next
morning.
Thiscan
cost
the
new local
more
money
than he
has
in
his
entire
account.
Furthermore,the fact
that
some
brokers
have
an aversion
totrading
with
new
locals
is
oftencompounded
by the
size
of
orders
manybrokers
have
to
fill.
The
"small
spec"
is
gone from
some
of
the
contracts,
but
especially
the
bondswhere
the
influence
is
primarily
commercial.
Con-
sequently,
the
majority
of
the
"paper,"
or
outside orders
handled
by
brokers,
consists
of
very
large-sized
lots.
Salomon
Brothers'
Plaza
Clearing Corporation,
Citicorp,
Shearson
Lehman,
Dean
Witter
Reynolds and others trade actively
so
that
brokers handling
institutions
and
orders
for
these
firms
fill
100-lot
orders regularly, while
single lots
are
more rare,
Another
problem
for
the
local
in
gettingthe
edge
is
the
basic
mechanics
the
broker
faces
individ-
ingup
a
trade.
Ifa
broker
hasa
100-
lot
order
in
even
a
medium-paced
marketthe
prospect
of dividing
upthe
order
five
ways
to
hit
more than
onelocal
causes
a significant
risk.
The
badge
initials
and
clearing
house
number
of
each
trader
as
well
as
theprice
and
quantity
must
be
re-
corded
or
at
least
remembered.
It
is
not
so
easy
when prices
are
changingfast.
The
broker
will
take
the
safest
route,and
hit
the
guys
who
"trade
size.
"
Yet
for
the beginner,
trading
one-
Iot
ordersis
a
must. Even
five-lots
violate thecapital
rule
of
not
over-
trading
for
a
smallerlocal
and
can
end
in
destruction.
In
a
rapid
mar-
ket, the
$31.25
losses
at
each
minimum
price
change
accumulate
very
fast. Wealth can
be
redistrib-
utedveryquickly
from
the
begin-
ning
local
tothe
seasoned
few. Even
though
one-lots
are
hard
to
come
by,
beginning
locals
can't
afford
to
trade
:.
:f
46
INTERM
ARKET
I
De
cemberI
9
8
4
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