Wild Wheat: Why the Pits Went Wild This Week

There was a time when commodities markets were viewed with deep suspicion by farmers, who saw speculators and gamblers manipulating the prices of crops to benefit themselves and steal from farmers. In 1874, one house of the Illinois legislature approved a bill to make it a crime to trade a futures contract unless the seller actually had possession of the crop. The Chicago Board of Trade managed to water down the law to bar the trading of options, but not futures, and thus stayed in business.

If those legislators had seen yesterday’s action in the wheat pits at the Chicago Board of Trade, they might have concluded that they got it right the first time.

Within one hour, from 9:30 a.m. to 10:30 a.m. Chicago time, wheat futures leaped 23 percent. The move affected all contracts this year, whether for delivery in March or December.

May wheat, the most active contract now, sold for $8.93 a bushel at the end of 2007. By the high yesterday morning, it was at $13.495. Today it closed at $11.69.

Today, we got some idea why the action was so wild. MF Global, a company that went public last summer, said a trader had made unauthorized wheat trades yesterday morning that cost it $141.5 million. It said it had fired the trader.

It is not easy to see how that much money could have been lost so rapidly in the wheat pits, even with the wild price action. I hope that investigators will seek to learn details of just what the trader did — and for how long he did it.


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