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Bond-Trading Scare At CBOT Puts Trust On Trial

November 21, 1992

Undated (AP) _ Trust is worth more than cash in Chicago’s tightly knit community of futures and options traders. A broken word can bring down an empire.

It nearly happened last month to Lee B. Stern & Co., one of the Chicago Board of Trade’s elite 120 clearing member firms, when an independent trader backed financially by Stern wildly exceeded his credit limit while dealing in Treasury bond futures.

Darrell Zimmerman’s Oct. 22 trading spree caused a downward spike in Treasury bond prices and is under investigation by Board of Trade and federal authorities. It cost Lee Stern personally $8.5 million and his company its status as a clearing member of the exchange, which means it can no longer sell trade-processing and credit services to others.

Such breaches of trust occur on a smaller scale several times a year at the Board of Trade and the Chicago Mercantile Exchange but the Zimmerman-Stern case was the worst many members could recall.

In the aftermath of the Oct. 22 incident, Chicago’s futures exchanges are reviewing their policies regarding the closely guarded relationships among clearing members, smaller brokerage firms and independent traders with an eye toward preventing future abuses.

The likely outcome will be higher standards for those seeking credit, new restrictions on those who exceed credit limits and an accelerated push toward automation and electronic record-keeping.

Such moves run counter to the industry’s tradition of fighting for unfettered trading in the pits, where players have been screaming and hand- signaling their buy and sell orders in the same way for more than 140 years.

Yet steps must be taken to protect firms like Stern, which risk their capital to stake others in the business, said Dale Lorenzen, one of two candidates for the Board of Trade chairmanship.

″With the open-outcry free markets we have here, you can’t have a member of your firm standing behind each trader you have on the floor watching what he does,″ Lorenzen said.

His opponent, Patrick Arbor, said: ″We have to do everything we can to prevent it from happening again.

Arbor and Lorenzen, both longtime exchange insiders, are seeking to succeed lame-duck Chairman William O’Connor in the Dec. 9 election.

Lorenzen heads a committee that is overseeing tests of an electronic trading card that eventually will supplant the paper cards on which traders record their dealings. He said financial and position limits can be programmed into each card to prevent the user from overreaching.

The electronic cards are not expected to be in wide use until late next year, though.

Arbor and Lorenzen both said they would favor an exchange rule prohibiting independent traders who take positions in excess of their credit limits from receiving the profits from such trades. Such a measure would remove the incentive to go out on a limb, they said.

The Commodity Futures Trading Commission, the federal agency that regulates futures trading, is writing rules to implement a new law requiring independent traders to register with the CFTC, as futures brokers must. The measure is a provision of the Futures Trading Practices Act, which was signed into law last month (although not as a result of the Zimmerman-Stern case).

The registration process will include a fingerprint check and a form on which the applicant is asked to disclose business relationships and any violations of laws or trading rules.

Barry Lind, chairman of Lind-Waldock Futures Inc., another clearing firm that deals with independent traders, said the registration rule will help prevent abuses, but increased communication among the clearing firms will help more.

″The best way this gets stopped is by a network,″ he said.

Tony Saliba, a former trading firm chief who now runs the International Trading Institute, a trading school, in Chicago, said the big firms should talk to each other more about the people who come to them seeking credit. Many times, he said, an applicant will have gotten into trouble at another firm.

″A big component would be a network just to actually talk to each other,″ he said.

Here are some commodity price trends for last week:

Grain and soybean futures turned in a mixed performance on the Chicago Board of Trade.

Wheat for December delivery settled Friday at $3.70 1/4 a bushel, down from $3.73 1/4 a week earlier; December corn rose to $2.13 3/4 a bushel from $2.12 1/2 ; December oats fell to $1.43 1/4 a bushel from $1.46 1/2 ; January soybeans slipped to $5.59 1/2 a bushel from $5.62 1/4 .

Livestock and meat futures advanced on the Chicago Mercantile Exchange.

December live cattle rose to 75.15 cents a pound from 74.32 cents; January feeder cattle rose to 82.92 cents a pound from 82.27 cents; December live hogs climbed to 44.60 cents a pound from 43.42 cents; February frozen pork bellies rallied to 42.37 cents a pound from 42.10 cents.

Precious metals were mixed on New York’s Commodity Exchange.

December gold slipped to $335.30 a troy ounce from $335.40; December silver rose to $3.757 a troy ounce from $3.750.

Energy futures had a mixed week on the New York Mercantile Exchange.

Light sweet crude oil for December delivery rallied to $20.40 a barrel from $20.08; December heating oil fell to 57.31 cents a gallon from 57.70 cents; December unleaded gasoline rose to 56.20 cents a gallon from 53.61 cents; January natural gas sank to $2.155 per 1,000 cubic feet from $2.296.

End adv for weekend editions Nov. 21-22

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