Last week, however, the once cloudy future of futures took a sunnier turn. In the all-important first round of trials stemming from a showy FBI sting, a federal jury returned guilty verdicts on only a few lesser counts. On Capitol Hill, a battle pitting more conservative Wall Street interests against the freewheeling futures markets appeared to be swinging Chicago’s way. The Merc’s Leo Melamed says of the tussle in Washington, “We’re looking to put this issue behind us so we can get back to business.”
The verdicts were a stunning blow to the government. On the heels of the Wall Street insider-trading investigation, the U.S. attorney’s office had promised to shake up Chicago markets when it disclosed the multimillion-dollar undercover probe in January 1989. In the first trial, the government charged that three traders of Swiss franc futures cheated customers by swapping at prices different than on the floor. But jurors deadlocked on most of the more than 100 counts (including a racketeering charge). Defense lawyers quickly pointed out that the convictions were for losses totaling about $200. Said defense attorney Harvey Silets, “If there was anything wrong here, it’s the same as you or I driving down the expressway at 57 mph.”
Chicago officials had one day to celebrate before turning to another front. Hearings in Washington continued last week on a Bush administration proposal to stiffen regulation of the futures markets. Chicago markets have long been criticized as capitalism’s casinos, where players wager on the future price of everything from soybeans to stocks. After the 1987 crash, Treasury Secretary Nicholas Brady headed the government study which lashed the Chicago markets for intensifying the selling panic. Now Brady–the former chairman of the Wall Street firm of Dillon, Read–is leading the charge to shift regulation of stock index futures from the Commodity Futures Trading Commission to the Securities and Exchange Commission.
Brady and SEC chairman Richard Breeden aim to hike futures margins. Buying a futures contract can require less than one tenth the margin of a stock purchase. Chicago’s critics argue that the relatively low margins open the door for speculators, whose rapid buy-and-sell habits can add volatility–the bogeyman of Wall Street. Because index arbitrage takes advantage of price differences between stock and future prices, Wall Street argues that fluctuations in Chicago can roil stock prices. The result? “We’re scaring away millions of people from the [stock] market,” says Richard Cantor, partner in the Wall Street firm Neuberger & Berman.
Market war: Chicago says raising margins will scare investors from their markets. Karsten Mahlmann of the CBT says there’s no evidence that margin levels affect volatility. Chicago believes it’s caught in the middle of a bureaucratic turf fight, pitting the SEC against the CFTC. And they fear their market share will be the casualty. From nothing 10 years ago, overseas futures exchanges have snared 37 percent of the financial futures market . “This is war,” says Melamed, “and we can lose it.”
Who will win the clash of cultures? Brady has put a great deal into the fight. “He’s ringing more doorbells than a Chicago alderman,” says University of Chicago professor Merton Miller. Still, the Bush bill appears in trouble. The administration has already pulled it once from a Senate vote when it lacked support. Chicago’s case has been helped by efforts like the Merc’s requirement that traders attend ethics classes. And the Merc and the Board of Trade are spending $5 million to develop a system of handheld computer terminals to record trades more accurately. Chicago admits an upside to the recent pressure. It helped remind them that more than soybeans, more than grain, trust is a market’s most valuable commodity.
