Code of Honor in the Trading Pits : Commodity brokers stick to oral deals, no matter what. Those who back out are soon washed up.

Life is raw down in the pits of the Chicago Board of Trade and the Chicago Mercantile Exchange. The margin between wealth and bankruptcy is often just a few numbers shouted across a roiling crowd of hungry traders.

Traders and brokers must live by their wits, remembering their trades themselves, scratching down each bit of business on paper cards that they then stick in their pockets. Contracts worth millions of dollars are bought and sold by a flip of the hand or a shout across a pit.

But like the Wild West, traders insist that there is an unwritten code of honor on the exchange floor, one that insiders say keeps this seemingly chaotic system from devolving into a truly bloodthirsty business:

A trader’s word is a word of honor--and as good as a written contract.

Indeed, in the midst of the widening federal investigation of corruption in Chicago’s trading pits--which is focusing on charges that commodities traders have been cheating their outside customers--traders still insist that they never cheat each other.

“You can’t cheat a man staring you in the face all day in the pit,” said Randy Wells, a vice president at the Chicago office of Balfour Maclaine, a major commodities trading firm. “All day long, it’s your word of honor.”

Traders say that if you say you will buy or sell under the venerable “open outcry” system that still prevails in the pits, you don’t back out on the deal later, even if prices suddenly move the wrong way. Sometimes you have to stick to your word even if you misspeak and find yourself buying when you should be selling.

Traders who do try to back out of oral deals are soon washed up.

“Your word is your bond down there,” said Patrick Tully, a graying Board of Trade trader, as he drank a nerve-calming beer after a day of trading under the glare of the media spotlight on the commodities trading investigation. As he spoke, he pulled out a deck of cards on which he had written down all of the deals he had agreed to during that day’s frenetic trading session. “These cards are contracts, just as much as any long-winded piece of paper.

“If you don’t live up to it, you’re out of business.”

Insiders in the commodities markets, who acknowledge that publicity surrounding the federal investigation is likely to have a devastating impact on their industry’s public image, are reluctant to discuss the probe. It is apparently looking into charges that traders and brokers have shortchanged their customers out of millions of dollars. But they want the public to know that their mysterious little world couldn’t run if they were constantly cheating each other.

“If I say ‘sold’ to you, it’s sold, and if I say ‘bought,’ it’s bought,” said another top executive of a trading firm. “There has to be a code of honor.”

Veterans tell of notorious cases in which floor traders went down in flames because of oral mistakes that they then had to back up with cash.

Some remember one gold trader at the Board of Trade several years ago who accidently bought hundreds of contracts for gold when he had actually received an order to sell them. Gold prices promptly dropped the limit for the day, and the trader had to come up with $800,000 to make good on the contracts he held. He was forced to sell his seat on the exchange and go out of business.

“If I’m not quick enough, then I’m stuck,” said one executive of a trading house.

The best enforcers of this unspoken code are the traders in the pits. Traders usually know each others’ trading habits so well that they can tell whether one trader in their pit is lying about whether he actually planned to buy or sell.

Street-Smart

“You’re in a crowded pit, so crowded you can’t even turn around without hitting five other guys, and you stand in the same place, holding the same (trading) card, next to the same guys every day, so the other guys know how you bid and offer,” said Wells.

“If the trading is going real fast, you might try to catch up right afterward and yell across at the other guy and make sure you got the deal right, and make sure you’ve got his (badge initials and clearing number) and name right. But if you say, ‘Hey, I meant to sell instead of buy,’ the other guy will say, ‘No, you didn’t.’

“Hey, they’re street-smart guys down there. They know what you’re doing.”

Trading Signals

The Chicago Mercantile Exchange has 2,724 members:

625 trade everything and wear gold badges

812 trade in international monetary markets and wear dark green badges

1,287 trade index options and wear dark blue badges. All use these hand signals:

1. Cancel the order

2. Six bid: Numbers 6 through 9 are quoted with horizontal fingers; 1 through 5 are quoted vertically. When a trader’s palm faces away from his body, he’s selling; when his palm faces his body, he’s buying.

3. Call option

4. Put option

5. Quantity of 100 Bid: Volume quotes are given with the hand touching the face; price quotes are given with the hand in front of and away from the body.