Improper trades stun markets Chicago exchange is probing deals


A series of improper trades in Treasury futures and options early yesterday morning at the Chicago Board of Trade, estimated at as much as $2.5 billion, jolted the markets and briefly sent Treasury prices plunging.

When the trades, apparently made by a trader accompanied by two customers, were sold off soon thereafter, evidently at the order of board officials, prices rebounded to previous levels.

Board of Trade officials, who said they are investigating the incident, said they had referred the matter to the U.S. attorney's office and the Commodity Futures Trading Commission. But they provided few clues of their own, leaving traders buzzing over what had happened in their midst.

In the pits where the trading is done at the board, guests on the floor are not unusual. They come to observe the tumult that accompaniesthe commerce on the world's largest commodities exchange.

The guests, who are often big customers, are called "suits" because their business suits are impossible to miss in the sea of colorful jackets that adorn the traders and distinguish them from each other.

So the two "suits" on the floor with a trader at the opening of the exchange at 7:20 a.m. yesterday Chicago time created no surprise.

But their actions did. The suits, apparently customers, ordered and the trader executed a series of improper trades of Treasury futures and options that, by some accounts, may have totaled as much as $2.5 billion, a huge amount by any standard. And they did it in the view of hundreds of brokers and traders.

According to several traders who watched the transaction develop, the event had the slow-motion quality of a giant accident, with the trader acting on orders from his customer guests beside him on the trading floor. Such orders from the floor are not allowed because they might give customers there an edge over other customers.

"The guy was standing next to him, and the broker leaned over, and then the broker started executing orders," said a trader, referring to one of the guests.

"He can't do that," the trader said he told colleagues as he watched the orders flashed by the trader with the use of hand signals into the trading pits.

Security guards and board officials, who were alerted by the size the trades and calls from the pits, soon arrived and whisked the offenders off the floor. The trader and his guests were still being questioned at the board last night, officials said.

In a statement issued last night, the board did not confirm or deny what occurred on the trading floor. It did say, "We do not tolerate any improprieties in our markets, and when questions arise, we take quick action to investigate whether any of our rules and regulations have been violated. That was certainly true in this case."

That the board also notified the U.S. attorney's office in Chicago and the Commodity Futures Trading Commission in Washington reflected a vigilance possibly strengthened by the memory of the government charges in 1989 of trading fraud in the pits at the board and its neighbor, the Chicago Mercantile Exchange. The charges led to some guilty pleas and the convictions of several soybean traders.

For all the witnesses, few facts were available about the actual trades, although accounts of what traders saw were being passed around all day. Few of the accounts identified the trader, but he was said to be backed by Stern & Co., a Chicago trading and clearing business.

No executive from Stern & Co. returned telephone calls. The company has been a member of the Board of Trade since 1970, and its founder, Lee B. Stern, has been a member since 1949. Mr. Stern was once the owner of Chicago's professional soccer team.

Late in the day, Dean Witter said it had assisted in the unwinding -- or the reversal -- of the trades, leaving many to try to guess at the losses taken in the process.

Traders estimated those losses at $10 million, but no one really knows. Several traders also speculated that local traders in the pits made millions as the improper trades were unwound because they knew what was going to happen.

Traders calculated that if about 12,000 futures contracts, with a value of $100,000 each, were sold as the market rebounded, each 1/32 tick in price meant a loss of about $375,000. Within half an hour, the price of the 30-year bond future rebounded half a point -- or 16 ticks -- and then climbed for the rest of the day.

Some traders expressed surprise that the rule was broken, since the customers could have gone off the floor, called in their orders and made the same trades legally.

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