Consider this: the Mexican peso was abruptly devalued last fall. If you had bought peso futures, which are traded in “contracts” binding you to accept a fixed quantity of pesos at an agreed price on a specified date, you were trapped. From one trading day to the next, you had lost more than $30,000 on each million-peso contract. And one Toronto client of Richardson Securities of Canada, the biggest Canadian commodities dealer, had 60. He had been able to buy so many because commodities are traded “on margin” with the investor putting up a minute fraction of the contract’s real value. He was financially annihilated. Richardson Securities, with a pained grunt, had themselves to shell out more than a million dollars.
It’s easy to say this shouldn’t happen (particularly to Richardson Securities, who have had previous disasters with clients unable to pay up). But it does, because of the extraordinary speed and unpredictability of the commodity futures markets, their ability to trap investors while making dramatic moves on little or no trading volume, and the leverage the margin system allows. However, leverage works both ways. If the peso had moved up as much as it went down, the Toronto client would have made close to two million dollars on an investment of perhaps $150,000. It has been done. And the prospect is enough to keep luring investors in. Trading on North American commodity exchanges doubled in 1972-76, and it is up another 30% this year so far, although brokers openly say that almost everyone loses money over time, and under some theoretical circumstances losses can be infinite.
The economic function of the futures markets is to allow farmers and commercial users of a range of products such as corn and eggs to fix a price at which they can sell and buy in advance. This enables them to plan ahead. They can also “hedge,” by contracting to sell (“go short”) a product they need to keep in stock. Then, if the price subsequently falls, the loss on their inventory is canceled by the profit on the short sale. It is this respectable-sounding business that the staider Canadian investment dealers such as Wood Gundy Limited hope to attract as they reluctantly get into commodities. However, some cynical Chicago traders believe that even commercial users can’t resist the temptation to join the ant-like hordes of small speculators, who never intend to take delivery of the commodity but whose willingness to hold it for a while in the hope of gain makes hedging possible.
Although many brokers regard the volatile futures markets as purely speculative, the idea that they could be adapted to the traditional investment objectives of preserving and increasing capital has a sirenlike seductiveness. One large investor rumored to be successful is Fred McCutcheon, son of the late Senator Wallace McCutcheon and a founder of Toronto investment house Loewen, Ondaatje,
McCutcheon & Company Limited, who manages family money. Al Friedberg of Toronto commodity dealers Friedberg & Co. Ltd., insists that it’s just a matter of patiently following major trends, as he has done during the recent spectacular rise of cocoa and coffee. Friedberg requires unusually high cash reserves for a client— $25,000—so that the margin initially deposited can be reinforced if overwhelmed by loss on a short-term swing. Friedberg’s firm, which is not actually a member of any exchange except the relatively unimportant Winnipeg one but instead works through brokers, has attracted much investor attention since its foundation in 1971.
Certainly, there is burgeoning interest in commodity trading among the investment houses, who are nearly as fed up with the stock market as are their clients. “Any Toronto Stock Exchange member firm should be making 10% of its gross revenue from commodities within a year of setting up,” asserts Lome Levy, who has done at least that well and possibly much better— he’s not saying—for Yorkton Securities Inc. of Toronto. In fact, so many new firms are invading the business that the older, es-
tablished ones are eagerly anticipating Ontario legislation to regulate the business. In part, they are distressed by some of the more colorful practices of the Runyonesque characters on the fringe of the commodities world. Stories abound of customers’ accounts being “churned,” traded recklessly to generate commissions; of orders being “crossed,” matched internally rather than taken to the exchange floor; and even not being executed at all, the classical bucket shop technique predicated on the hope that the trade will go wrong, and the customer won’t expect all his money back. Pat Bartlett, who when representing Clayton Brokers in 1974 imported two large Texans to encourage his clients to pay their bills, is now said to be operating in Vancouver after the St. Louis firm indignantly severed relationships. But the bankruptcy of Commodity World Consultants in 1976 saw its head, AÍ Cowan, charged with fraud. More recently, Toronto police raided half-a-dozen firms specializing in London commodity options—agreements to buy futures—and the Ontario Securities Commission moved to restrict their sale. Although options themselves are perfectly legitimate, it was alleged at a subsequent osc hearing that some firms had charged excessive premiums and not always executed orders. Two firms, Locan Commodity Options Inc. and Commodity Options Ltd., four of whose salesmen have since been arrested for illegal immigration, were linked to an aggressive Toronto-based commodity operation, C. M. Nationwide Trading Ltd. Jack Wesley Savage, a principal of C.M. with extensive Chicago experience, is involved in complex litigation about fraud surrounding the now-defunct American International Trading Corp., and was expelled from the Mid American Commodities Exchange last November.
The spectacle of so many investors negotiating such hazards for a slight chance of spectacular gain is a remarkable tribute to human courage, or greed, depending upon taste. Last week, amid crumpled order papers and shrilling telephones, a broker sat in his shirt-sleeves, wearily contemplating the battle raging in the United States between the Commodity Futures Trading Commission and the oil-rich Hunt family of Dallas, who are attempting with their customary brutal enterprise to squeeze the soybean market as earlier they hit sugar and silver. Soybeans had gone berserk, ruining his calculations. “What do you need in this business?” he echoed morosely. “A strong capital base—and brass balls.”
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