CHICAGO — Millions of dollars are made and lost in commodity futures every day, but when three metals traders were caught on the wrong side of the gold market last March, it drew the attention of the entire industry.
Their losses led to the failure in March of Volume Investors Corp. of New York, and no single event in 1985 drew more attention to the many issues facing the industry, one that already was struggling through the apparent contradiction of record growth and severe contraction.
"It's been another tough year," said Art Marcus, chairman of the Futures Industry Assn. "It's been a year of further consolidation within the industry."
Trading volume is exploding, yet companies that trade commodities are closing or merging with one another. One struggling commodity exchange even decided to merge with another.
Both trends have been evident for several years, but 1985 marked the first year that more interest-rate futures were traded than agricultural futures.
The explosion in financial futures has spawned a plethora of innovative new contracts--new ways for some industries to reduce risk and for others to take risks.
Along with innovation has come the regulatory headache of keeping track of the increasingly complex strategies that futures traders employ, a task shared by the Commodity Futures Trading Commission and the National Futures Assn.
Somebody was not watching in March when three traders on the floor of the Commodity Exchange in New York agreed to sell 1.2 million ounces of gold shortly before the price jumped by $35.70 an ounce in one day, by all accounts an historic and unpredictable rally.
The three traders were unable to pay off $28 million in losses, and Volume Investors, the company that handled their trades, defaulted on its requirement to cover their losses and was put into bankruptcy.
In an unprecedented move, Volume's other customers found their funds locked up in bankruptcy proceedings. Never before had one customer's funds been used to cover another customer's losses.
The issue wound up in court, and customers who were not involved were still waiting to recover a portion of their funds at the end of the year.
Calls for Insurance Fund
The event spawned calls for an industry insurance fund like the Securities Investor Protection Corp., which protects investors from losses if stockbrokers go out of business.
The commodity commission proposed new rules for commodity brokers that prompted a loud protest from the industry.
The Chicago Mercantile Exchange also devised computer software that could disclose in seconds the amount of risk a traders' position involved.
Industry leaders agreed at a conference in September that Congress was likely to raise those issues in 1986 when it considers reauthorizing the commodity commission, the federal agency that regulates the industry.
Other issues likely to be addressed include leverage contracts, audit trails and the contention of some farmers that the futures markets drive down their prices.
The commission maintained a moratorium on companies that could sell leverage contracts, a sort of futures contract that is traded off exchanges. Only three companies are allowed to trade them under the moratorium.
The commission also issued a call for the industry to establish a way to record the order in which trades are made in the pits--an audit trail.
The federal agency had found that it was unable to recreate trading sequences to investigate charges that speculators were manipulating soybean prices in 1983. Nevertheless, the commission said there was no reason to believe that the charges were true.
A small group of farmers persisted in making such charges, though.
Missouri farmer Wayne Crytz, founder of the American Agriculture Movement, led about 100 farmers in protests outside the Chicago Board of Trade and the Mercantile Exchange and charged that speculators were responsible for low prices.
Kalo Hineman, a member of the commodity commission and a wheat farmer himself, said past studies had never concluded that speculators were the cause of low farm prices.
1985 was a year of depressed prices, as the Commodity Research Bureau's index of 27 commodities plunged to a seven-year low in September. The index was climbing from those depressed levels by the end of the year.
Low prices distressed futures traders as well as farmers, as trading volume in agricultural commodities continued to sink. Volume in corn, wheat and soybeans at the Board of Trade fell 34% for the first 11 months of the year, compared to the same period of 1984.
Total volume at the nation's 11 exchanges increased 4% in the first 10 months of the year. Agricultural volume was down 23%, while interest rate and foreign currency volume was up 28%.
Slow business in the agricultural sector prompted the 105-year-old MidAmerica Commodity Exchange to ask the Chicago Board of Trade to take it on as a subsidiary. Members of both exchanges approved, and the move was awaiting approval from the commodity commission.
The industry also continued to develop new contracts during 1985.
New stock indexes, a contract on the trade weighted value of the U.S. dollar against a basket of foreign currencies and even a contract on ocean freight rates were being traded at various exchanges.