“Ten years ago, a magazine such as this would not have been possible. In this past decade, futures trading has come of age.”
When Todd Lofton introduced Commodities magazine with these words in the Volume I, Number 1, February/March 1972 preview issue, he could hardly have imagined the changes just ahead for the trading world, beginning within months after the first issue. The timing was perfect for Lofton, a former Navy officer who had gotten into trading. Lofton couldn’t find any current publications covering futures and decided to start his own.
In the 500 issues since then, Commodities became Futures magazine, featuring hundreds of sound trading concepts, opinions and ideas as the trading industry unfolded and evolved from one development to another, intertwined with each other as tends to happen over time. From all of this material, this is one person’s view of some of the key events, personalities and articles that highlight the progression of trading during the first half of those 500 issues—subjective choices, to be sure, but a starter list of events that shaped the trading industry.
Nixon closes the U.S. gold window
Although this event occurred on Aug. 15, 1971, several months before the first issue of Commodities was published, President Nixon’s national television appearance imposing a wage/price freeze and a 10% surcharge on imports also shut down access to U.S. gold (COMEX:GCQ14). Without the ability to convert U.S. dollars to gold, other nations could not peg their currencies to the gold standard, bringing an end to the Bretton Woods Agreement and several successor attempts to set fixed exchange rate systems.
With the value of currencies able to float and the backing of a prominent economist like Milton Friedman, the currency futures market was born at the Chicago Mercantile Exchange’s (NASDAQ:CME) (CME) International Monetary Market after a failed attempt at the International Commerce Exchange in New York (not to be confused with today’s Intercontinental Exchange) in the early 1970s. IMM trading started slowly on May 16, 1975, but eventually took off as money became the ultimate commodity with a long-lasting effect on all other markets.
Commodity price breakouts in the mid-1970s
During one of the seemingly continuous Middle East Arab-Israeli conflicts, the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo on oil exports to the United States and other supporters of Israel in 1973, and also established production quotas in an attempt to control the supply of oil, leading to sharp increases in oil and gasoline prices as well as long lines at U.S. gas pumps.
Crude oil (NYMEX:CLU14) wasn’t alone in moving to new price plateaus. Grain and soybean prices also reached astronomical levels due to a confluence of unusual events:
- The “great Russian grain robbery” in the late summer of 1972 after crop failures caused Russia to come to the United States to buy large quantities of wheat before most U.S. traders realized what was happening.
- Extremely wet conditions in the fall of 1972 delayed the harvest of a significant amount of U.S. acreage until after the ground had frozen in early 1973, reducing the size of U.S. crops.
- Disappearance of anchovies off the coast of Peru due to the effects of El Niño, cutting into one of the main sources of protein in U.S. animal feeds. Demand for protein sent soybean futures prices to a peak of $12.90 per bushel in June 1973, causing U.S. officials to embargo exports of soybeans and meal.
- U.S. crop production problems during the “triple-whammy” year of 1974: late planting due to a wet spring; a suddenly hot, dry summer; and a Labor Day frost that cut yields.
The cumulative effect of these developments sent consumer prices soaring, raised government concerns about inflation and prompted various regulations to control markets — remember the WIN (Whip Inflation Now) buttons? The net result was an economic slowdown/recession that led to a sharp stock market setback. For traders, the mid-1970s will be remembered for their volatility that created a new world of both opportunity and risk.
The Fed makes its move
As the inflationary 1970s unfolded, the inflation rate rose from about 2% in the 1960s to double-digit levels by the end of the 1970s. The Federal Reserve seemed to have little control over the pace of inflation. Then, on Oct. 6, 1979, the Fed under Paul Volcker changed its focus from controlling interest rates to controlling the money supply.
Individual traders didn’t seem to realize the implications of that policy shift at first. It did bring inflation under control and eventually produced more stable conditions, but at the expense of interest rates that topped 15% and led to a sharp recession. More recently traders have learned to watch Fed meetings and statements closely for clues on monetary policy, particularly in the age of quantitative easing, but the 1979 Fed decision was a new experience for showing how much influence the Fed has on markets.
Introduction of listed stock options
Traders have had dozens of new instruments to trade over the years, but perhaps one concept that has had the broadest effect was the launch of trading in listed security options in 1973 at the Chicago Board Options Exchange (CBOE). An offspring of the Chicago Board of Trade (CBOT), the CBOE began trading call options on 16 stocks on a deck floor above the main floor of the CBOT in 1974, borrowing some concepts from futures contracts.
Eventually put options would come along in 1977, the list of options would grow to almost every major stock and the CBOE would have its own building across the street from the CBOT as it built its own identity.
Although Commodities started with a focus on futures, the magazine carried its first article on the CBOE and one of its first listed call options (Northwest Airlines) in the April 1973 issue, barely a year after the magazine was launched. As Lofton began to turn more of his attention to options, he was willing to sell Commodities to Merrill Oster, co-founder of Professional Farmers of America, and Oster Communications took over publication of the magazine with the March 1976 issue, Volume 5, Number 3.
New concepts, new instruments
Listed stock options weren’t the only new kid on the block as innovators in the trading industry came up with new ideas and new products.
The first futures contract based on a financial instrument, Government National Mortgage Association (GNMA) certificates, began trading at the CBOT in 1975 followed a few months later by Treasury bill futures at the CME, Treasury bond futures at the CBOT in 1977 and Eurodollar futures, the first cash-settled futures contract, in December 1981. These opened the door for another whole new area of trading instruments.
Cash-settled futures on stock indices were the hot new thing in the early 1980s, both for traders and for regulators trying to decide who controlled what. Futures on the Value Line Index at the Kansas City Board of Trade were first out of the gate, followed by futures on the Standard & Poor’s 500 Index at the CME — no one could get rights to trade futures on the Dow Jones Industrial Average initially.
With the introduction of so many financial instruments, the clamor in the industry was that “we don’t trade commodities, we trade futures.” That led to the name change from Commodities to Futures magazine with the September 1983 issue—an issue that, incidentally, profiled legendary trader Richard Dennis and his Turtle traders.
The next big newcomer to the product mix was options on a few selected commodities in the fall of 1982, and then on several stock indexes in early 1983 as part of a pilot program that tested the new concept cautiously. Options eventually became a permanent part of the trading scene and played an integral role in the trading plans of both individual and institutional traders.
Oct. 19, 1987 is noted for the largest one-day price plunge in stock market history and had a significant effect on traders’ perception of the market. As with other market collapses or abrupt price moves, the conditions that led to the crash and corrective actions that were taken are still the subject of study.
The effects of the crash and the Savings & Loan crisis of the late 1980s took time for the trading industry to absorb and may have delayed some developments such as electronic trading. But the one bottom-line fact that stands out is this statement from the Commodity Futures Trading Commission (CFTC) history log: “No CFTC-regulated systems fail and no firms default on obligations” as a result of the 1987 crash.
And, as Futures editorialized in the December 1987 issue, “If it had not been for the index contracts, the stock market debacle on Oct. 19 most likely would have been much worse than it was.”
Role of regulation
As the record grain and soybean (CBOT:ZSU14) prices spiraled higher in 1973-74, there were concerns about excess speculation and market manipulation. In addition, futures had moved into new areas such as currencies and were being developed for interest rates. Congress decided to move regulation of futures from the Commodity Exchange Authority in the U.S. Department of Agriculture to an agency of its own, the CFTC.
It took the five commissioners of the new CFTC some time to be selected and to set up the structure of an agency, but in April 1975, the CFTC assumed regulation of all U.S. futures trading. The CFTC was also the first federal agency with a “sunset” provision: Congress had to reauthorize the CFTC every few years or its existence expired.
Each reauthorization has had its share of drama and political battles over the last 40 years as the industry and regulators dealt with occasional defaults, squeezes and sometimes outright scams that threatened the integrity and credibility of the marketplace. One of the more tumultuous periods came in the late 1970s when the CFTC banned trading in so-called “London commodity options” and dealt with trading issues related to President Carter’s grain embargo to the Soviet Union and the Hunt brothers attempted squeeze in the silver market.
The early 1980s brought in a breath of fresh air under Philip McBride Johnson as CFTC chairman. The period ushered in a series of new products as the Shad-Johnson Accord sorted out jurisdictional issues among government bodies and set up a registration process for brokers, commodity pool operators and commodity trading advisors as part of the Futures Trading Act of 1982.
CBOT President Warren Lebeck worried about the dangers of letting the regulatory “camel get its nose into the tent” at the first meeting of the Futures Industry Association at the Innisbrook Resort in Tarpon Springs, Fla., in March 1976, but the oversight role of the government came to be viewed as one of the necessary evils to gain customer acceptance in a business that had some history for shady practices. Included in the new regulatory structure was the first self-regulatory futures organization, the National Futures Association, which began operations on Oct. 1, 1982.
Computers and commodities
Computers were an important subject for the magazine from Issue 1, which included an article entitled “Computers and Commodity Trading,” co-authored by a young assistant professor at the University of California, Berkeley named Richard Sandor, who became known for developing the first interest rate futures and later for contracts related to the environment.
This was at a time when institutions may have had mainframe computers used for research by creative traders, but most individual traders were still producing their own charts with paper and pencil. When Apple introduced its first personal computers (PCs), Apple became the basis for the CompuTrac platform, developed by a group of traders and headed by Tim Slater in the late 1970s.
When IBM announced its first personal computer in August 1981, some IBM officials were skeptical that individuals would ever need or use a computer. But the PC put trading and market analysis at traders’ fingertips.
When Louis Mendelsohn of Market Technologies released the first strategy back-testing software for personal computers in 1983, there really was no trading software industry — there were no “apps for that,” in today’s terms. Enterprising software developers soon jumped on the opportunity, including Bill and Ralph Cruz of Omega Research, who introduced System Writer at Futures Expo 1987 (Super Charts and TradeStation would come later from Omega).
Electronic trading takes over
As PCs became ubiquitous on trading desks, exchanges began to develop automated trading systems, keeping plans under wrap at first in an effort to not upset the open-outcry crowd that dominated trading. When the CME announced on Sept. 2, 1987 that it would incorporate a Post-Market Trading (PMT) automated system into the exchange by early 1989, CME general counsel Leo Melamed said the system would promote trading worldwide overnight without pulling volume from the open-outcry trading floors.
Whether that was a smoke screen or officials didn’t actually realize the impact electronic trading would have, the matter was a moot point—for a while anyway-—as the stock market crash and more urgent issues got in the way. After a name change to reflect the growing global impact on markets and refinements to the platform, the system emerged as Globex and made its first trade in 1992, five years after it was announced.
With the launch of the Internet in the 1990s and the increasing role of individual traders using personal computers, electronic trading became the only way to go. As the size of the S&P 500 Index contract grew larger as the stock market rose, the CME introduced E-mini S&P futures (CME:ESU14), one-fifth the size of the original contract, in 1996, and it soon became the most actively traded U.S. futures contract.
Electronic delivery has also taken over the information business as some print magazines have disappeared, and many readers only see the online version of magazines such as (Futures.com) on web sites.
It is impossible to highlight all the standout articles, the authors who contributed them and the personalities who appeared in the 500 issues of Commodities/Futures over the years, but a few might be considered groundbreaking. We point those out throughout the story and have digitized most so you can read them online at futuresmag.com.
Larry Williams’ first article, “Measuring Market Momentum” (October 1972), was a great one. His articles on seasonal trading, Commitments of Traders, his %R indicator and other topics introduced new ideas. He was also the thinly-veiled source for an anonymous interview in the Market Millionaires series that appeared in October 1974 after the release of his book, How I Made a Million Dollars Trading Commodities – Last Year.
Oster Communications had conducted Pro Farmer seminars that drew about 100 people, but when Williams appeared at a Commodities seminar in 1976, he packed the house with more than 230 attendees. He has been a sure-thing seminar draw for all the years of Commodities/Futures’ existence and remains probably the most widely known individual trader worldwide.
Welles Wilder Jr. wrote an article on his Relative Strength Index in the June 1978 issue. Wilder was author of New Concepts in Technical Trading Systems, a book that is probably the greatest source for innovative technical analysis concepts.
William Degler’s article, “19 options strategies and when to use them,” in the June 1984 issue. His format for showing strategies became sort of the Cliff Notes Bible of options trading. Degler followed up with more than 20 articles that clearly elaborated the options strategies in a Futures series that ran through 1988.
Steve Nison introduced candlestick charts to the western world with his article in the December 1989 issue, before his book on candles was published. He added other articles later as candles became, perhaps, the most widely used chart style.
So many other names should be mentioned for their contributions: Jack Schwager, Mark Powers and Leon Rose. From the earlier days: Bob Prechter, Phil Tiger, Hal Bressert, Jake Bernstein, Ray Dalio, Richard Donchian, Tom DeMark, Robert L. (Bucky) Isaacson, Ed and Phil Gotthelf, John Murphy and Alexander Elder.
Other names will undoubtedly come along in the next 500 issues whether you read the print or online versions of the magazine.
Darrell Jobman contributed to Futures for more than 20 years and is a former Editor-in-Chief of Commodities/Futures. He is now a senior analyst for TraderPlanet.com.
Sidebar: Futures and options
Option markets were a part of futures almost from the beginning. The options market grew out of the futures market and the innovative leadership from the Chicago Board of Trade and O’Connor brothers.
Futures were created for producers and consumers of commodities to transfer risk. Options are a more precise tool to transfer risk. They were first launched on equities in the smoking room of the CBOT, and the Chicago Board Options Exchange (CBOE) spun off as the leadership of the CBOT did not want the Securities and Exchange Commission (SEC)—which necessarily would have oversight over options on securities—to be too involved in their business.
The value of options soon proved themselves as competitors to CBOE were formed and continue to be formed. Futures markets would soon list options on futures, which today makes up a significant part of exchange volume.
When it became necessary to separate CBOE from the CBOT it created one of the most difficult legal battles in the industry. The CBOT needed to split off CBOE for regulatory reasons, but as its creator, recognized CBOE as a valuable business in its own right. The solution was to give each full member of the CBOT an exercise right on the CBOE. Many members would trade on both exchanges, and many CBOT members made their living trading options on CBOE. As the trading world evolved and exchanges began to demutualize, the question of what happens with those exercise rights spawned numerous battles and lawsuits between the two exchanges that sat across the street from each other. The battle delayed CBOE’s initial public offering and was not fully resolved until the CME Group was formed with the CME’s purchase of the CBOT.
Options coverage and options strategy articles—both equity options and options on futures—have been a part of Futures from the beginning. In fact, if the timing of our name change had been different, one could see “options” being used in our title.