Amid soaring grain prices, a dying cry

Online trading made its quiet debut at the exchange six years ago and, after a major expansion in late 2006, it has grown quickly to 40 percent of all deals. The expectation that all trading one day will migrate online means an end to the face-to-face deal making -- known as "open outcry" -- that heralds from the late 19th century.

The timing couldn't be worse. For the past year, open outcry wheat traders have enjoyed one of the most lucrative trading periods in the exchange's history. The cost of membership in the exchange continues to set records. Prices of wheat -- which accounts for the bulk of trades at the Grain Exchange -- have never been higher. This past week saw an unprecedented five-day streak of prices rising the maximum amount allowed each day.

Traders share stories about the surging market: the young trader who just bought an expensive condo; the broker who made six figures in a day; another who miscalculated and got "blown out," losing everything in one day just weeks before the holidays.

Riding a volatile wave of record prices and risky trades, the open outcry traders only can watch as online markets claim more of the action. In the end, when open outcry goes, it won't die with a whimper.

This is going to end with a shout.

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It's a few minutes before the opening bell on a fall trading day. High up on one of the trading floor's walls, numbers tick and flip on an electronic board, signs of life from markets in New York where trading has already begun. Broker Tim Lee stares at a computer, checking wheat prices in the overnight markets. They offer a hint, but no guarantee, of what's to come in minutes.

Lee has trading orders today from Archer Daniels Midland, one of the largest grain firms on the floor. Lee will watch the price in the opening minutes of trading: If the price goes up, he sells. If it goes down, he'll buy.

It sounds simple, but if the market moves too quickly, he could "miss" the trade, with unknown consequences for the customer.

"I don't know why they're doing it. I don't know the person," he says. "I'm just going to do the transaction they've asked me to do and hopefully I won't miss that."

Lee is an independent trader. He can buy and sell with his own money, but he often works freelance for ADM, trading the futures contracts that come due in a specific month. He's paid $1 for each 5,000-bushel contract he trades.

Lee was an attorney who first learned about the futures market through a client. He traded futures in New York, then came to Minneapolis, the smallest of the nation's exchanges, because it was the cheapest place to start out. A former chess player who climbed to the rank of Grandmaster, Lee likens trading futures to playing a game.

"A lot of people when they get into the market all they think about is money, winning and losing money. And that's bad. You need the mentality where you're just like, 'I'm trying to get this score higher.'"

Seconds from the opening, Lee makes his way to the floor, his buy and sell orders in hand.

"This is real easy," he says.

Losing shirts

If farmers sold everything as it was harvested, the oversupply would sink prices. Futures contracts allow them to set a price today for the future sale of pork, wheat, beef or grain.

For food companies, futures contracts make it possible to lock in a price for commodities months ahead of time. It's why a box of Wheaties sells for the same price every day, despite the changing price of wheat.

Yet, for every trader who buys commodities on behalf of a food company, many more buy and then sell to other traders before it's delivered, hoping to make a profit as the price fluctuates.

These speculators can make millions riding the crests and troughs of the wheat market. Using the rules of the futures marketplace, where someone with a few thousand dollars can control a commodity like Minneapolis wheat worth much more, the brokers can double their money if the price of wheat climbs 30 cents. Or they could lose everything if the price drops 30 cents.

Buy too much, play your hand too strongly, follow your gut, sell at the wrong time; there's a thousand ways to be wrong. And when you're trading futures and you're wrong, you can lose more money than you have, even more than you ever imagined having.

The history of futures trading offers heart-stopping stories of superstars who lost their touch, of billionaires and even Nobel laureates who thought they knew the market and then lost billions.

Barings Bank, a British institution that had financed the Louisiana Purchase, collapsed 10 years ago after one trader lost $1.6 billion. More recently, French bank Société Générale discovered trader Jerome Kerviel had lost $7.14 billion in European stock index futures. He was arrested weeks ago.

And still the futures market, an American invention that demands daring and not just a little bit of luck, draws people like Lee every day with the lure of enormous wealth.

Farmers to traders

Lee enters the octagon-shaped trading pit. Black lines on the wooden floor delineate the area into sections: stand in one area to trade March wheat, stand in another for December, or another to trade options.

Lee, standing at the edge of the March wheat area, bounces in place in a pair of Brooks running shoes. The opening bell rings and the air fills with the shouts of about two dozen traders.

"5 March! 5 March!" Lee shouts. His trader's shorthand means he'll pay $8.35 a bushel today for wheat delivered in March.

A wave of noise rises from the pit brokers, but no one answers him. Seconds pass. He shouts again, offering a penny more.

"6 March! 6 March!"

A deal is struck. Numbers on the trading board overhead flip and change, showing the new price for Minneapolis Hard Red Spring Wheat. (Within months, the price will climb to nearly $15 a bushel.)

Lee scribbles the terms of his purchase on a card. Next to him, deals continue, as three men eager to sell press close to a buyer.

"Take mine!" "Take mine!" they shout in unison.

Building a city

Founded in 1881 as a centralized marketplace for farmers to sell their crops, the Minneapolis Grain Exchange helped build the Minnesota grain trade into the largest in the nation. Many of the men who built their fortunes around grain -- Cargill, Pillsbury, Loring and Washburn -- live on today as city and institutional namesakes.

While no longer the center of the state's business community, the exchange has never been busier. In recent months, trading volumes have tripled to more than 10,000 contracts changing hands daily.

It used to be that wheat prices rarely changed more than a few cents a day. Now, it's not uncommon for prices to swing 30 cents in one day, the maximum amount allowed under the exchange's rules. (The maximum has been hit so many times in recent months that exchange officials plan to increase it to 60 cents on Sunday, and later this month some limits will be removed altogether.)

"It's been crazy," says Ryan Kelbrants, a staffer at Archer Daniels Midland. "I don't know what you compare it to."

Shouts. Shoves. Screams.

It's inevitable that arguments flare up. Sometimes the reason you're losing money is standing right in front of you.

In the pit, a shouting match erupts between a veteran trader, Carter Ohrt, and a younger trader, Patrick Commerford, who endures the mildly derisive nickname of "Bucket." Bucket, wanting to buy one month and sell another at the same time, had asked for a price from Ohrt, who gives him one. By the time Bucket has the rest of the deal together, Ohrt's offer has expired.

The other brokers clear a path as Ohrt and Bucket square off, but the fight's quickly over.

After an initial frenzy, trading dies off and Lee retreats to one of a dozen cubicles adjacent to the pit. He expects trading to build again before today's 1:15 close, but for now he hunches behind a screen to research other markets. "Look at this!" Lee points at a graph of soybean prices, which plunged 45 cents a bushel in a few moments. To a non-trader, 45 cents may not sound like much, but it's enough to seriously hurt an independent trader like Lee if he's not careful.

"They're getting wilder than we are," Lee mutters to himself.

A lull falls over the pit and most traders wait for the prices to change, but one broker wants to buy. He calls out using the shorthand of open outcry, shouting the last number of the price he's willing to pay and the number of contracts he wants. He calls out in a low, firm voice. His words rise up from the trading pit, and for a moment he sounds like a preacher intoning an obscure prayer to his flock.

"0 for 100!"

"0 for 100!"

"0 for 100!"

End of an era

The death of open outcry has been predicted for years, since the invention of the Nasdaq in 1971, the world's first electronic stock market. Electronic trades can be executed faster, at the push of a button.

An open outcry order, meanwhile, usually begins with a phone call. At the ADM booth, orders pour in by telephone and over an electronic ordering system. Kelbrants and a small staff take the orders and run them the 30 feet to brokers in the pit, sometimes the phone still tucked to their ears, its cord trailing behind like a tether.

Seconds later, if the trade goes well, the broker returns with news that they've made the trade and records it on a rate card. Exchange employees, standing in the pit, also record the trade. It can take a minute, or more.

The Grain Exchange first introduced after-hours online trading in 2002. On Aug. 1, 2006, the Grain Exchange expanded online trading to daytime hours.

Open outcry pits have been shut down from London to Hong Kong. Traders of currency futures in Dublin, Ireland, will be sent home at the end of this month. There's no date for shutting down the Minneapolis Grain Exchange open outcry trading floor, though many expect it will happen within the next few years. Mark Bagan, grain exchange CEO, put it this way: "The trading floor is going to be open as long as customers take their trades there."

Some open outcry traders will migrate online. Some already have, using computers set up last year in the trading pit to trade electronically while listening to the floor action going on around them. For a few traders, though, it will be the end of a career.

"Old things die hard," said Jeff Tregillis, the floor manager for ADM, who, like others, ruefully accepts a future when trading will be fast and anonymous, without the shouts or the bluffs or the personalities.

"When you go all electronic there's nobody to talk to anymore," he says. "There's no human interaction."

Back in the pit, Lee needles another broker about that future.

"I'm too old and dumb at this," says Kevin Sallstrom, a trader who also farms.

"You've got to play more video games!" says Lee, pushing his theory that kids with quick fingers will make great online traders.

Lee will make his last trade of the day today just seconds before close. He will stand with his right hand clutching the lapel of one broker and his left hand tugging at the shoulder of another. The bell will sound, and the Minneapolis Grain Exchange will fall silent.

Matt McKinney • 612-673-7329