Easy Money: Handicrafts on the Floor of the Chicago Exchange

NORTHBROOK, IL -- With their frenzied flailing and lunging contortions, the futures traders of Chicago are the world's most powerful mimes. Each business day their animated gestures are used to buy and sell a trillion dollars in commodities, everything from bonds to bacon. There is a precise choreography in those fidgets and twitches, and an astute investor -- like you -- would appreciate a rational explanation of this trading code.

However, this is Chicago, so you can forget about the rational. The trading code is a slapdash accumulation of signs, jokes and idiosyncrasies. Like the city, it is blunt, fast, funny and it works. An initiation into the full mysteries of trading semiotics might require two months of your undivided attention. This paltry introduction can hope only to enjoyably confuse you.

Let's start.

Lesson I: Das Kapital und Das Digital

The Chicago exchanges have proclaimed themselves "Free Markets for Free Men." Of course, some men are freer than others. At both the Chicago Board of Trade and the Chicago Mercantile Exchange, the trading floor has a distinct hierarchy. It is ruled by the brokers, who have all the advantages of robber barons. Brokers represent the public's orders, but they also trade for their personal accounts. This prerogative is an inherent conflict of interest, but most brokers abide by a certain etiquette. They can be larcenous but not felonious.

Beneath the brokers are the "independents." They trade only for themselves. Their chief responsibility is to continually ingratiate themselves with the brokers to get a few morsels of the public orders. Finally, doing the indispensable drudgery, are the clerks. They are the heroes of this story. Since the hand signals are a grueling form of manual labor, who but the clerks would do it?

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Clerks work for the brokers and the trading firms. The biggest brokers employ more than a dozen clerks to manage the volume and rush of orders. The clerks rely on hand signals as a fast and efficient method of relaying orders and information. With a few gestures of the hand, a clerk can transmit a customer's order across a crowded trading floor.

Consider the slower alternative. A clerk takes an order over the telephone. He leaves his booth above the exchange floor, rushes down the stairs, weaves and rams his way to the specific trading pit, screams his orders to the broker and then fights his way back to his booth. In the meantime, his telephone is unanswered and three frustrated customers want to disembowel him. Then, the hapless clerk will have to repeat the gauntlet to see if the order is filled.

This punishing process was the traditional method of communicating orders, and the clerks were once called runners. Of course, the bond market of today is more hectic than the sorghum market of 1910. At the Chicago Board of Trade, the futures on 10-year Treasury notes have an average daily volume of one million contracts. To meet that pace, the exchange would need more runners than take part in the Boston Marathon. Since the advent of financial futures in the 1970s, a system of hand signals evolved as the means of trading communications. Now, the firm's clerk and the broker's clerk can transmit market-shaking orders with a few theatrical gestures.

Lesson II: The Manual Manual

The clerk needs good eyesight, physical coordination and a masochistic nature. He is required to correctly identify and precisely transmit intricate hand signals, while a customer or broker is bellowing in his ear. Through his fidgets and grimaces, he communicates the specific future or option, its expiration month, whether he is buying or selling, the quantity of the order, the price and his trading firm. Someday, medicine may discover a correlation between trading and arthritis.

To complicate a clerk's life, each commodity has its idiosyncratic code. One hand signal may have three different meanings in three different trading pits or at the different exchanges. For example, extend your little and index fingers toward the floor. That symbol designates "M," which could mean Merrill Lynch (MER Quote), Morgan Stanley (MWD Quote) or the month of June. A simple clerical mistake can cost many thousands of dollars.

Now that you are eager to trade, here are the rudimentary hand signals.

First, get the attention of your specific market. If your trading booth is situated next to one of the most active pits, such as bonds, eurodollars or S&P futures, you will have no trouble making eye contact. The challenge comes when your booth is halfway across the trading floor from your market. The traders have evolved a series of tasteless physical gestures that will connect you to the appropriate trading pit.

If your order is for Japanese yen, you take a finger and slant an eye. You alert the British pound pit by taking a fist and "pounding" the top of your head. For marks, take two fingers and make a small mustache (at least those traders have a sense of history). The French franc symbol requires a lascivious display of the tongue, and I won't go into further details.

Once you have made visual contact with the pit, you then signal whether you are buying or selling. Hold your hands up to your face. If you bring your palms toward your face, you are buying. If you push your palms away from you, you are selling.

If you are making a bid, you next indicate the price of your order. This is how you represent numbers. Keep your hand upright and extend your index finger: that means one. Extend your index and middle fingers: that means two. Do you detect a pattern? Well, you're wrong. For some sadistic reason, the symbol for three is the little, ring and middle fingers. If you were to raise your index, middle and ring fingers, you would be signifying only your faith in the Nicene Creed. In a concession to sanity, the numbers four and five are what you'd expect.

To represent the numbers six through 10, first twist your hand to the side. By extending only your index finger, you signify six. The extended index and middle fingers mean seven. Eight is the same trap as three: extend your little, ring and middle fingers. Nine is four extended fingers. Ten, however, is different. It is a clenched fist. How would your represent a bid of 29? Extend your index and middle fingers, clench your fist and then extend your four fingers sideways.

Your next concern is representing the number of the contracts in your bid. You can accomplish this by smacking various parts of your face. Your chin accommodates the first nine numbers. An upward index finger is one, a sideways index finger is six, etc. The system becomes more complicated at 10 and above. You are now using your forehead as well as your chin. An upright index finger on the forehead means 10; a sideways index finger there signals 60. To represent a bid for 77 contracts, you first tap your index finger and middle finger sideways on your forehead, then apply them sideways to your chin. If you want to buy 100 contracts, you tap a clenched fist to your forehead.

An order for 743 contracts would require the following choreography: First tap your index finger and middle finger sideways against your forehead, then clench your fist against your skull, slap your four upright fingers against your forehead, and tap your little, ring and middle fingers against your chin. At the same time, you should pray that you correctly transmit the order and that the other clerk will correctly interpret it. With so many various signals for both the price and the quantity, it could be effortless to scramble the order.

Mistakes have happened. Several years ago, a major bank was willing to bid 70 for 40 futures contracts. (The bank was bidding 70 cents for 100,000 units of a foreign currency per contract, for 40 contracts.) The bank's clerk used the correct hand signals, but the broker's clerk misread the bid as 740 contracts at the market. The market order was immediately executed, and the fill was promptly reported by hand signals. The bank naturally thought that its modest order had been executed. Twenty minutes later, written confirmation reached the bank's trading desk, and the bank discovered the mistake. In that short time, the clerical error had already cost the bank $280,000. Worse, the broker refused to admit his clerk's mistake. The bank, foregoing a time-consuming arbitration process, absorbed the entire loss.

Now, add this to every trading clerk's woes: He must know the hand signals for each month of the year, the symbols for the brokerage houses and trading firms, and the codes for options and their strike prices. The responsibilities seem overwhelming, yet there is never a lack of applicants for the 7,500 positions at our two futures exchanges. Indeed, the positions are coveted, and nepotism has employed many a clerk.

Why? First, the trading chaos can appeal to your sense of adventure. Who ever heard of a bored buccaneer? Then, the money is good. They have the humble title of clerk, but their earnings can be equal to those of middle management. Salaries are in the mid-five figures, and holiday bonuses are expected to be generous. Furthermore, the money can get even better as a clerk advances. Many of the robber baron/brokers began their trading careers as clerks. The ambitious clerk has a promising career in his hands.

So, when you next see a broadcast from the bond pit, look for those frenzied fingered clerks. Their hand signals may seem bewildering and amusing, but they're essential to a trillion-dollar-a-day market.