THIS has not been a good year for Chicago futures exchanges. In January, reports surfaced of a two-year undercover probe of the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange. The federal investigation included undercover agents who posed as traders and conducted illegal trades with several members of the exchanges.
In July, the CBOT made an unusual move against an Italian trading firm, which it claimed was buying up soybeans in an attempt to squeeze large profits out of the markets.
Then last week, federal officials announced that 46 brokers and traders at the two exchanges had been indicted.
Yet - surprise, surprise - business has increased at both Chicago exchanges. Volume for the first six months at the CBOT is up only slightly from the same period a year ago - 2.1 percent - while exchanges all over the world are seeing explosive growth (see chart). But at the Chicago Mercantile Exchange, known as the Merc, volume is up spectacularly.
``It hasn't hurt our business so far this year,'' says Andrew Yemma, spokesman for the Merc. For the first six months of the year, the exchange posted a healthy 37.8 percent gain in volume over the same period last year.
Thus, if the bad publicity from the federal probe had an impact on the CBOT, the logic goes, then volume should also have gone down at the Merc. Since it didn't, traders, futures officials, and other observers suspect that economics may be playing more of a role than bad publicity.
``This is the worst advertising we could get,'' says Gordon Linn, president of Linnco Futures. But ``I can't tell you that we have lost any business because of it. I don't feel [the concern] from our customers.''
Business in the grain pits was bound to slow because the big weather scares earlier in the season are over, he adds. ``We are in bear markets.''
What has helped the Chicago exchanges is that they have taken swift action to tighten up their surveillance since the Federal Bureau of Investigation probe became public in January, says Thomas Russo, a New York securities and commodities lawyer. ``The bad news has led to a speedup in a positive evolution in the markets,'' he says. ``I think most people are tolerant when they know problems are being addressed.''
In April, for example, the Merc came out with a series of proposals aimed at cracking down on abuses alleged in the federal indictments. The CBOT, meanwhile, has enhanced its computer system, tightened reporting standards, and beefed up its investigation and audit staff by 30 percent.
Congress is taking its own tack in reforming the exchanges. On July 26, a House agriculture subcommittee approved tighter restrictions on the exchanges. The most controversial point: an almost total ban on so-called dual trading. In other words, traders will not be allowed anymore to execute customers orders while trading for their own account.
``I don't think any exchange is immune'' to bad publicity, says Thomas Donovan, president of the CBOT, which has appointed a futures expert to look into dual trading. ``We work every day to make sure the world knows that we have integrity.''
The exchange holds it was exercising that integrity in the bizarre Ferruzzi incident.
On July 11, the CBOT took the unusual move of ordering any trader holding contracts of more than 3 million bushels of soybeans to cut the position to 1 million bushels. The target of the order was Ferruzzi Finanziaria S.p.A., which at the time had orders to take delivery on 23 million bushels - or about twice the amount of soybeans conveniently located to fulfill those contracts.
The Italian trading firm said the action was unfair, saying business would go to other exchanges if such actions were allowed. But the CBOT claimed it was merely maintaining orderly markets, and it wasn't alone. In a confidential letter to Ferruzzi, Wendy Gramm, chairwoman of the Commodities Futures Trading Commission, ordered the Italian trading company to reduce its holdings to a reported 3 million bushels. The CBOT apparently acted after that federal order had become known.
After the news broke, several traders grumbled and took the side of Ferruzzi, which argued that it was merely using its position as a hedge against export orders and its own processing needs.