What really happened at the End of Trading Places - PRECISION TRADING LABS
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What really happened at the End of Trading Places

December 14, 2021

​People enjoy seeing their “worlds” on TV or in the movies. Viewers love to debate how accurately (or not) being a lawyer; EMT, doctor or nurse; or a cop is depicted.

Less common but equally true is Wall Street and trading. Billions is the TV gold standard. In movies, two titles, both now over 35 years old are the most beloved:  Wall Street (“Greed is good, greed clarifies…”) and Trading Places (everyone’s introduction to frozen concentrated orange juice-FCOJ). And honorable mention for the more recent Margin Call which is very good, but not iconic and lacks characters remembered or loved today.

Trading Places is awesome. It’s ginormously good and fun. But besides that, if you paid attention it was a mini trading education and a primer on supply and demand.

<Spoiler alert!!! – although should one really be concerned about that for a movie that came out in 1983?>
The Duke brothers’ explanation of how brokers function and supply & demand to Eddie Murphy (Billy Ray Valentine) in the back of the limo is great. Their example of pork futures and  “bacon, like bacon in a bacon, lettuce and tomato sandwich,” justifies the movie right there. It’s that funny but also accurate. But the climactic trading floor scene rewarding our heroes, Valentine and Dan Ackroyd (Louis Winthorp…the third) and wipes out the Duke brothers is supply and demand in action and nicely depicted.

The Dukes are commodities market makers and brokers. As part of this, they are also proprietary traders, i.e., they trade their own accounts. But in their case, greed isn’t good. They pay for an illegal advance copy of an orange crop report to gain inside information. Valentine and Winthorp learn of the plan, and behind the scenes maneuver the substitution of a phony report stating the forthcoming orange crop would be low. This forecasts a low supply of oranges to make FCOJ, so FCOJ will become much more expensive. Meanwhile, the real report will say the crop will be normal, so prices will actually remain relatively stable in the short- to mid-term.

After getting the phony draft report, the Dukes act on it the next day, when it’s scheduled to become public a few minutes into the trading session. They start aggressively buying FCOJ at the open, accumulating FCOJ futures contracts. They expect FCOJ prices will soar once the (phony) crop report about a low orange harvest comes out (lower supply and higher demand = higher prices), resulting in a huge profit. 

The Dukes start aggressively accumulating and other brokers and traders pile in since everyone knows the Dukes and figures “they know something.” The buying fuse lit by the Dukes illustrates another well-known trading concept, “FOMO,” the fear of missing out. So, while the Dukes and other traders are paying higher and higher FCOJ prices, they believe they’ll be rewarded when the official report is released and prices spike.

But it’s not to be. The real report’s issued, and everyone realizes there’s no coming price surge. In fact, FCOJ prices were already driven far too high by the buying frenzy. Then the fun really starts…

The traders stand silently for a few seconds after the report is broadcast, realizing their predicament and they’re about to get smoked. Then, one of our heroes yells out at the top of his lungs an order to SELL SHORT a slew of FCOJ contracts, knowing that will set off a selling cascade. The panic bubbling beneath the surface is ignited and a selling frenzy starts as everyone who just bought FCOJ futures (at inflated prices) looks to dump them and limit the damage, and prices come crashing down.

As the wild selling ensues, our heroes gauge the panic on the floor, the order surge and how prices are descending. They wait, they wait, they wait and when they sense the time is right, they now yell out orders to BUY THE SHARPLY DISCOUNTED FCOJ FUTURES, which serves two purposes:

  • The fact that there are more willing buyers actually aids the selling frenzy, as now there are some more people willing to take the contracts off of the panicking sellers’ hands. It certainly doesn’t drive prices up, but introduces more liquidity into the market, facilitating trading.
  • This enables our heroes to cover the short position on the futures they initially sold, since they are obligated to buy them back in order to close the position. 

So when the smoke clears:

  • Our heroes sold short really high and bought back really low, pocketing the difference and closing the positions for a massive profit
  • The Duke brothers and the pit traders who followed them all lost money, with the Dukes, naturally losing the most by far. 
  • On both sides, everything was fueled by the basic concept of supply and demand, and how price is the lever between the two

Lastly, if you’re curious about what happened to the Duke brothers after getting throttled by their own scheme? Here’s another spoiler…Watch another 30+ year-old Eddie Murphy movie, Coming to America, to find out!

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​See you there,
Ryan

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