With the holidays approaching, I thought I’d take a break from my usual commodity market predictions and share with you a great story I hope you’ll enjoy.

A floor broker friend of mine told me the following story about a decade ago. He says he believes it’s a true story because once upon a time (many years ago now) he hired one of the main characters in this story as his floor clerk--which is how he got to hear it.

The clerk told my friend he once had an opportunity to join a college buddy of his in San Diego to become a commodity broker. He quickly packed, left Chicago and moved to the West Coast.

The San Diego office he joined produced some business, but nothing spectacular. Customers would come, many would lose and leave, and new ones would come to take their place.

One afternoon, staring out of their office window (which looked out over the Pacific Ocean), these two characters spawned an idea. They discussed how just about all of the customers would lose money in commodities; in fact, 80 percent of the trades would ultimately be liquidated as losers. With this thought in mind, our two characters placed an ad in the San Diego paper to hire rookie commodity “trainees.”

After interviewing a number of applicants, they hired 10 entirely average guys. They told these newly hired gentlemen they’d perform the normal duties of a commodity broker, servicing customer accounts and the like. In addition they each were going to be given a rare opportunity: The 10 would each be given a $50,000 trading account with the firm with “no strings attached” to “manage” a portfolio of commodity trades. If they could show profitable performance, they’d be able to share in the profits and receive these profits as a bonus.

The rules were simple. They could each trade the $50,000 accounts as they saw fit, and there was just one procedure they had to follow. Unlike other trades for customers of the firm, if they were going to place a trade in their managed accounts, the order had to go through one of the two principals (either the owner or the guy from Chicago).

You have to ask yourself why these two would trust 10 novices--we’re talking 10 raw rookies here--with $500,000 of their money. Well, it was all just a diabolical scheme the two hatched that one afternoon.

What would happen is one rookie broker would call to buy 10 cattle contracts, one would want to sell short seven soybeans, and still another would buy three copper or short five silver contracts. The two guys behind the scheme would call the various trading floors and sell 10 cattle, buy seven soybeans, sell three copper or buy five silver contracts.

In other words, they’d do exactly the opposite of what their traders wanted them to do. The money in the traders’ accounts was fictitious; the firm’s money was, in reality, going the other way, with opposite positions. The next day, fictitious position sheets would be distributed to the traders, showing them what the rookies believed to be true.

It’s a fact of commodity futures trading that 80 percent of the novices lose money. Inevitably, the fellow who “bought” the cattle couldn’t stand the market moving against him, so he’d call one of the two principals to liquidate his “losing” position. This was their signal to call the floor, buy back their shorts, and actually take the profits. The next day, the cattle trader would show a losing trade on his sheet, his $50,000 would be something less, but in reality the two principals were cashing in. This pattern continued with the guy in the beans, the guy in the copper, etc.

One trader actually lost his whole $50,000 in the very first week. He was immediately summoned to the boss’s office. Thinking he was about to be fired, he started to cry before anything was said. He said he’d been married for only a year, had just had twins and really needed this job. He promised he’d do better, he’d learn from his mistakes. He pleaded for another chance.

Imagine his surprise when they gave him another chance.

The fact was the boys couldn’t wait to recapitalize his account with another 50K. They also couldn’t wait for him to leave the office because they could hardly contain their laughter. By this fellow “losing” $50,000, they actually made $50,000 in the real markets. It was better than printing money.

The scheme proceeded much the same way for some time. One trader would blow out, then another. The only problem was the two bosses were finding it increasingly difficult to supply the traders with the fictitious statements along with every transaction. They just couldn’t keep up with the paperwork and started falling behind. Nevertheless, they continued on with the plan as best they could because it was so lucrative. Well, it was until the silver trade.

I should mention this was all happening during the early 1980s, around the same time the Hunt brothers tried to corner the silver market. Silver ran up to about $50 an ounce, and one day one of the traders called to sell short five silver contracts. Of course, our boys actually bought five silver. The silver market moved erratically sideways for a few days, then started to turn over and head south.

During this time, the trader who sold the silver went back to Kansas to visit his mother. While he was visiting, a tornado hit town, a tree fell on his mother’s house, the roof collapsed and he ended up in a hospital bed, unconscious. He remained in a coma for two weeks.

Meanwhile, our masterminds back in San Diego were wondering where he was, and when he’d take his “profit” so they could take their loss. In New York, they raised margin requirements, declared silver is for liquidation only and the market started its famous collapse.

The masterminds went belly up.

When the guy in the coma awakened, the first words out of his mouth were, “Get me a newspaper.” He immediately turned to the commodity section. When he saw how far silver had dropped, he screamed in ecstasy. Anticipating praise and looking forward to his huge bonus, he quickly called San Diego.

He heard two words: You’re fired.

George Kleinman is editor of Commodities Trends.

© 2006 George Kleinman
Editorial Archive

Can July 2007 corn exceed the all-time high price of $5? Time will tell, but I've recommended that Futures Market Forecaster subscribers maintain their core positions in the corn market. And I'm in the process of identifying selective trades that will allow us to pyramid core corn positions (recommended for purchase last August) with a reasonable projected risk point.

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