Crime in the Pits: The Regulation of Futures Trading

Abstract

In the late 1980s, the Federal Bureau of Investigation initiated an extensive undercover investigation of trading abuses in the two largest futures exchanges in the United States. Though the investigation received widespread media attention, the nature and significance of the crimes involved remain unclear to many people, largely because of the complexity of futures trading itself. This article describes the organization and operation of futures markets and provides an account of the offenses targeted by the investigation. Two structural components of futures trading, dual trading and the openoutcry system, criticized as offering ripe opportunities for abuse, are examined in detail. Finally, efforts at reform can be understood only when set within the context of organizational forces and pressures acting on the futures exchanges and the agencies responsible for regulation. In particular, the changing world market and competition for regulatory jurisdiction are offered as guides for understanding reform efforts.

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References

Russell Wassendorf , Commodities Trading: An Essential Primer (Homewood, IL: Dow-Jones-Irwin, 1985).

2. Commodity Futures Trading Commission , Annual Report (Washington, DC: Government Printing Office, 1976).

3. Jeffrey Zaslow , “Market Mover: Rumors Reagan Died Can Swing Prices,” Wall Street Journal, 3 Oct. 1986.

4. Mitchell Y. Abolafia, Taming the Markets: Self-Regulation in the Commodity Futures Industry (Ph.D. diss., State University of New York at Stony Brook, 1981).

5. Ibid., p. 66.

6. Greg Burns , “Some Dealers Talking Deals with CFTC,” Chicago Sun-Times, 1 Aug. 1989.

7. Philip M. Johnson and Thomas L. Hazen , Commodities Regulation (Boston: Little, Brown, 1989), 1:152.

8. Morton Lane , “ `Open Outcry' Works Well and Cheaply,” New York Times, 31 Dec. 1989.

9. As an example, one individual convicted of prearranged trading in the Japanese yen pit claimed that his biggest profits were made on what are called “government trade days,” the days when the government announces its trade deficit with other countries. Such days, particularly at the open and close of trading, bring large spreads between asking and selling prices. The larger the spread, the easier it is to come together in a prearranged trade. Moreover, because those days are particularly active, surveillance of such practices is especially difficult. See William B. Crawford, Jr. , “Merc. Trader Retraces Trail of Illegal Yen Profits,” Chicago Tribune, 8 Jan. 1991.

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10. Another factor often cited was the growing concern over the savings and loan crisis and the potential costs of it facing the government.

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11. Futures and Options World, May 1990, p. 15.

12.

12. Kevin G. Salwin , “Report by SEC Lashes Chicago Futures Mart,” Wall Street Journal, 25 May 1990.