You've probably seen pictures of traders wildly thrashing their arms and yelling orders in the trading pit. Although it may look like a poorly coordinated Village People concert, there is actual trading going on.
|
Many are ex-jocks with dirty mouths and bad manners, at least when they're at work. Many of them vacation in Las Vegas. Almost all are men, and some are so hooked on life on the edge that if the market gets slow, they will head for the traders' lounge for a $500-a-hand poker game.
"People say I've got a great job because it's just 41/2 hours a day, but I'm getting yelled at, spit on, elbowed, pushed; I mean it's tough in there," says Beau Roffman, a 44-year-old trader from Monmouth Beach, N.J., during a 50-minute lunch break. "But it's a lot of men fighting over money, so what do you expect?"
Roffman, a soft-spoken Grateful Dead fan, has survived 20 years in the crude oil futures pit. For a trader like Roffman, who owns his own seat and is gambling his own bank account for a living each day, these are especially trying days: The market has become as volatile as a California wildfire.
"I don't think there's ever been anything like it," says James Newsome, president of the NYMEX (New York Mercantile Exchange). "The thing about futures trading is it's always a zero sum game. For every winner, there is a loser, and while that creates opportunities, it creates greater risk, so the traders have to be extremely careful.".
These days, it isn't unusual for oil to move more in a day than it used to fluctuate in a year. From 1986 to 1990, the price of a barrel of light, sweet crude oil stayed between $15 and $20 in constant dollars. This year, fueled by speculators and international tension, the price started at $33 and recently hit an all-time high of $55.
Roffman is an anomaly among the roughly 300 traders in the oil pit. Having tens of thousands of dollars on the line has always been torture for him. He appreciates a quiet afternoon on a decent public golf course or a freshly groomed ski slope. He trades by a simple code: Expect the worst, and expect the worst to come fast, so hedge your bets. Always hedge your bets.
Traders can lose $100,000 in an hour or make $2 million a year. The trick is figuring out a way to land somewhere in the middle.
"One good trade that will be gone in 30 seconds can turn a bad day into a great one," Roffman says. "But the flip side of that is one bad trade can completely wreck a good one, just like that."
The story of how a civilized country ended up with a place like the oil futures pit goes back 132 years to an era when dairy farmers in New York became frustrated with the inefficiencies of selling their goods. They ultimately decided to establish an actual place to exchange products in downtown Manhattan.
That place became known as the Butter, Cheese and Egg Exchange, though soon traders of groceries, canned goods, dried fruits and poultry joined the fun. The growth led to the establishment of the New York Mercantile Exchange in 1882. The idea was simple -- bring your goods, announce a sale and sell to the highest bidder.
Enter the 20th century. Warehouses were developed and shipping systems improved, making obsolete the need for an actual "exchange" for the goods.
Manufacturers, though, wanted to find a way to lock in their prices months ahead so they wouldn't lose money if there were great swings in the costs of their materials. Also, the financial markets realized money could be made by speculating on whether the market for a commodity, such as wheat or chicken, would rise or fall in between the time the contract was signed and when the delivery took place.
It is known as trading a futures contract, which is what all the screaming, shoving and spitting is about.
It works this way: An oil company pumps crude out of the ground in Texas and sells it to a customer who wants to lock in a price, say $30 per barrel. But between the time of this deal and when the oil is delivered, that contract can be bought and sold many times in the futures market.
The traders in the pit usually don't take actual delivery of the oil and distribute it, though they could if they wanted to. Instead, they trade the contracts, often for months in advance, as rates fluctuate. A few pennies in either direction at any time during the next six years represent an opportunity to make -- or lose -- thousands of dollars in an instant.
And what these traders do matters. They help set the price of oil, which plays in the cost customers pay at the gasoline pump or to heat their homes.
Roffman didn't grow up dreaming of trading crude oil but inherited the job from his father, who bought a seat on the exchange in 1978 for $35,000. The elder Roffman spent his final years trading potato futures. When Beau Roffman took the seat at the age of 24, he tried oil.
"I lost money nine months in a row," he says. "It was pretty clear this wasn't the thing for me."
On the verge of quitting, Roffman and a buddy from the pits went out for a drink
Over several beers, Roffman says, he learned he was going about his business all wrong. Predicting the direction of a market as volatile as oil is a fool's game, his friend told him. But there was another way.
He needed to focus on the few pennies that can be made buying contracts during one month while selling contracts for another. The difference is known as the spread.
The job of a "local," the nickname for traders working their own accounts, is to make the market for the institutional traders, who may suddenly get an order from a client to buy or sell large numbers of contracts at a time. Each contract, known as a lot, is for 1,000 barrels of oil and these days is worth roughly $50,000.
Roffman and other locals get to decide for themselves when they buy and sell, setting the price of the market. Their only concern is their own portfolio, which usually includes about 400 lots on both the sell side and the buy side. The idea is the same for any financial market: Buy low and sell a little higher.
All the while, he is hedging his bets, making sure he has basically the same number of contracts to buy as he does to sell. That way he doesn't get stuck betting the market will move far in one direction or another. Three years ago, he went on vacation with an uneven position and watched helplessly as the market went the wrong way. After two days without making a move, he was out $80,000.
"The advantage I have as a local is I'm the casino, I'm not the customer," he says. "I have an edge in that I can see everything as it's happening. I can see the turmoil, and in that turmoil there are opportunities."
Roffman's day begins with a ferry ride from New Jersey. He doesn't spend time on the boat mapping out strategy.
"It's minute to minute, market to market, trade to trade," he says. "What I need to do changes, every time I make a move."
A few minutes before 10 a.m. he takes his position on the lowest step of the pit and waits for the opening bell, which brings the first rush of buying and selling. His eyes dart around the pit, watching the offers come and go.
He glances at the electronic scoreboards high above the floor where the prices listed for the next 12 months are constantly shifting in yellow, red and green lights, depending on the most recent trades.
The trades themselves are scribbled on cards and tossed into the center of the pit, where they are time stamped and recorded by a card clocker in less than 60 seconds.
One minute he is raising his hands, pushing his palms out, signifying he wants to sell and flashing the price with his fingers. The next, he reverses that motion, signaling a buy by pulling the air toward him.
When he wants to seal a trade, he darts across the pit to his buyer or seller to make sure the deal is complete and they didn't mix up their signals. He scribbles each transaction on a pad, always adding and subtracting what he owns, making sure he isn't too exposed.
By the time the market closes, his voice is hoarse and there is a glassy, dazed look about his eyes.
He spends an hour in the gym running and lifting weights after the close, then returns to the ferry, where he uses a pad and pencil to figure out what he has done.
"I made money," he reports, though he won't say how much. "Any time you do that, it's not a bad day."
Is there only one pit?
No, there's a pit for each commodity traded. CME has a lumber trading pit, a Eurodollar trading pit, an S&P 500 trading pit and so on.