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Hedging Stress

Cigars Ease the Tension for the Big Dogs on Chicago's Futures Exchanges
Alejandro Benes
From the Print Edition:
Pierce Brosnan, Nov/Dec 97

The Treasury bond pit at the Chicago Board of Trade is particularly active very early one Wednesday morning in February. Alan Greenspan, the chairman of the Federal Reserve Board, has just finished telling Congress that the Fed might raise interest rates in a preemptive strike against inflation.

A few doors down from the Board of Trade (CBOT), Tom Baldwin has his eyes glued to the screen of a video monitor that keeps track of T-bond prices. "The market's crashing," he says at 9 a.m. as small rectangles of cathode-ray green flash at him, indicating that the market is making a big move. "It's dropped a point and a half in a minute. That's a lot. That would be the equivalent of the Dow dropping a hundred points in five minutes. That would be huge. A million dollars. [Greenspan] must have been very bearish," Baldwin adds, not knowing or much caring what the Fed chairman specifically said. Baldwin, like most pit traders, really cares only how the market is moving. "Wow. It's going straight down."

Lucien Thomas Baldwin III, who goes by the acronym "BAL" that he wears on the badge pinned to his purple trading jacket, occupies the top rung on the volatile, high-stress ladder of trading in the Treasury-bond pit of the CBOT. He became the biggest in the world by withstanding the slings and arrows of outrageous fortunes being made or lost in seconds. Not that there is an official ranking of this kind of thing, but Baldwin's exposure on any given day is in the neighborhood of $5 million. Fellow traders call Baldwin "The King."

"Right now, I don't have a position [in the market]. I'm sort of glad I'm not there," Baldwin says, unconvincingly for a man who started with $20,000 in 1982 and has been known to trade as many as 60,000 contracts a day with a total face value of $6 billion. "When there's a big move like this where it just goes one way for a long run, somewhere in there you're gonna be on the other side of the order, but if it keeps going like this, you lose money."

Baldwin knows all this from personal experience. "I've made $2 million in a day, but I've lost $5 million in a day," Baldwin says. Five million dollars. Lost. One day.

On March 17, 1989, Baldwin, at the age of 41, started trading early. Here's how the Chicago Tribune later reported what happened:

The time: early morning, about 7:25 a.m. Within minutes, the government will release the latest producer price index figures, statistics that can send bond prices rollicking. Baldwin is bullish and has been buying T-bonds since the market opened at 7:20, believing bond prices are about to soar. The news hits. Nearly 500 bond traders and brokers erupt in a maelstrom of shouting and waving. Buying and selling. By now Baldwin has purchased a whopping 6,000 T-bond contracts. His market position is the equivalent of the annual budget of a Third World country. He controls a staggering $600 million worth of T-bonds. The market turns. And tanks. And keeps on tanking. Baldwin has guessed incorrectly. He furiously begins to reverse himself, closing out his positions. One after another. All 6,000 of them. By 7:45 it is over. The dust settles. Baldwin studies his trading card. He has lost $5 million without blinking.

Now worth "multimillions"--true to trader form, he won't tell how much money he has--Baldwin is able to look back at that day with little emotion. "The market went down, straight down for two points and there was no out. It was instantaneous and never came back," Baldwin now explains quite matter-of-factly, adding that most people view what he does as gambling. "Then you start over." Or you smoke a cigar.

"One afternoon Tom comes into the back office," recalls Joe Howe, the owner of Jack Schwartz Importers, a cigar store across the street from the CBOT. "He's kinda quiet and sits down here and lights a cigar and we're talking a little. He asks me if he can use the phone to check on his trades. He calls and then sits down again and says, 'Well, when I came in I was down $800,000. Now I'm down only $200,000.' This was in about five minutes."

Fortunately for the traders who live and die by these riotous changes in fortune, the area around the three big futures exchanges that trade in Chicago has spawned a mini-industry that invites traders to relieve their stress. In the CBOT is Rubovits, a cigar store. Across the street from the CBOT is the Mercy Hospital Stress Analysis Program. But Jack Schwartz, next door to that, is the preferred sanctuary for many of the traders. Part of the reason is the interminable lighthearted abuse to which every customer is treated upon entering. The shop also boasts the "coldest [soda] pop in town" and free matches. But probably the biggest thing the smoke shop has to offer traders is a level of understanding that comes from having been there.

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