Those who believe that the futures markets have been riddled with scandals are likely unaware that the history of stock trading in the United States was also grounded in scandals. Although the trading of shares in public companies did not originate in the United States, stock trading was very popular in America in the 1 700s. At that time brokers gathered near Wall Street in L.ower Manhattan to trade stocks alongside a 12-foot-high stockade. Although few (if any) formal rules and regulations governed stock trading, a radical change took place in 1798 as a result of a financial panic caused by William Duer. Duer had overextended his debts to several banks, which ultimately caused them to fail. Duer was sent to debtors’ prison for his part in the financial debacle. To help prevent similar problems in the future, 24 brokers met to formalize a variety of trading rules known as the Buttonwood Agreement.
In the early 1800s, trading moved indoors with the formalization of the stock exchange as the New York Stock Exchange (NYSE) in 1863. Brokers who elected to remain outdoors to do their trading were forerunners of the American Stock Exchange (AMEX). Several periods of boom and bust occurred in the stock market since the mid-1800s, not the least of which was the crash of 1929.
As I noted before, trading in stocks was not without its heroes and villains nor its periods of boom and bust. Those who point a finger at futures trading as a manipulated or high-risk game need only examine some of the numerous stock scandals that have continued to haunt the equities markets since their inception to see that where there is risk and reward there also exists the potential for crime.
Stock trading remained essentially unchanged for many years other than the implementation of checks and balances to control market corners and stock manipulation. It was not until the introduction of stock index futures in 1982 that the game of stock trading was to change forever. Stock index futures improved the ability of money mangers, as well as individual investors and traders, to hedge their stock portfolios against baskets of stocks such as the S&P 500-stock index or the Value Line index. Although the introduction of stock index futures helped bring some degree of stability to the markets, it also helped usher in a new era of speculation that, in my view, resulted in a much more volatile stock market.
Now, with the introduction of SSFs, another level of speculation has been introduced, one that could easily jump market volatility to a new level. Yet in spite of this possibility, the fact remains that every investor now has the ability to protect himself further from market swings as well as the ability to participate in stock trading by posting a relatively small amount of money. This will bring more money into the game and, if the SSF market functions as many markets do, the small investor—who is usually undisciplined—will lose money while adding a buffer to the markets. Remember that a zero-sum game (ZSG) in futures markets is the key to understanding the basics of who wins and who loses and will be discussed further in future chapters.