Roman Mars: This is 99% Invisible, I’m Roman Mars.
This is a little different episode today. I have two stories to play for you. One of them is the Collaborate Expanded with Planet Money last week about the movie Trading Places which I love. But in case you already heard that story on Planet Money which all of you should really listen to Planet Money, I wanted to tell you another short story that I’ve never released as a podcast but I’ve told it many times live when I do talks around the country. It goes like this.
Roman: Ladislav Sutnar was a check designer of everything- toys, dinnerware, houses but he was best known as one of the first people to be called an ‘information designer’. If you have used the internet, you have experienced a little bit of Sutnar’s pioneering work on displaying vast amounts of information in a pleasing way. He made beautiful infographics before most people even knew what an infographic was. But my favorite thing about Ladislav Sutnar was the largely un-credited work he did for the Bell telephone company. In the 1950s when 10 digit phone numbers with area codes were introduced across the country, Sutnar was charged with figuring out ways to depict the unyielding numbers in a user-friendly way. He created an internal book for Bell showing hypothetical business letterhead with the new area codes. Most of the mark-ups actually label the area codes with the words ‘area code’ and there’s some extra spacing and to make the numbers fall in manageable chunks. But in a couple of the examples, he devised a solution that ended up using a lot in letter design work to highlight and distinguish different information when you have a limited color palette and few options. Ladislav Sutnar was the man who put parentheses around area codes. It was implemented across all kinds of phone books and advertisements and phone number displays and it made life just a little bit easier for millions and millions of people. Now anyone who listens to 99 Percent Invisible doesn’t need to be told that everything is designed, that someone made a decision about every little thing in the built world. But this is an example I turned to when I want my mind blown at the microscopic level of detail, and which smart people are trying to make our lives better. There is no reason why area codes should naturally have parentheses around them even though, like the best design, it feels completely natural to use them now. Ladislav Sutnar thought of that.
Roman: Earlier this year I saw the movie “Trading Places” again on Netflix and I thought, “I’ve seen this movie over and over again but I’ve never really understood what happens on the trading floor at the end of the movie, and one of the great things about working in public radio is that it’s a pretty small world. So, I’ve met Robert Smith before and so I just wrote him at Planet Money and I said, “I want to do a story where you help explain the economics of Trading Places to me, and for everyone else like me who also doesn’t quite get it but loves the movie but doesn’t quite get it,” and so I want to share that story with you guys. It was so much fun working with them and I really like the story that came out.
Robert Smith: Back in the 1980s, Louis Winthorpe III was a big deal in the world of Futures Trading. He worked at a fancy firm in Philadelphia, and this guy knew commodities.
Dan Aykroyd: [As Louis Winthorpe III] Pork bellies. I have a hunch something very exciting is going to happen in the pork belly market this morning.
Roman: Louis was the best. He was about to get married and the future looked bright.
Dan: We are going to make a great couple. We’re going to have a great life.
Roman: Until his bosses, Randolph and Mortimer Duke, took all of that away from him.
Robert: And so begins the great parable about what happens when the rich become poor, the poor become rich and a con man inherits the Earth.
The movie is “Trading Places.” Hello, and welcome to Planet Money. I’m Robert Smith.
Roman: And I’m Roman Mars.
Robert: Looking good, Roman!
Roman: Feeling good Robert.
Robert: Roman Mars is the host of the podcast “99 Percent Invisible.” It’s about all things design and architecture. And, he’s on Planet Money today because he had an actual question for us about this movie.
Roman: Well, I love this movie. I saw it when I was way, way too young. I was probably 9 or 10, and I just wanted to know, is this the most sophisticated depiction of the inner workings of a financial market in the history of cinema?
Robert: That is the perfect question for us Roman Mars because we have the ability and we shall bring in an entire panel of experts in the commodities and Futures Trading world to fact check this movie. Today, on Planet Money, what the movie “Trading Places” can teach you about financial markets. And, I know this is of particular interest to you Roman, we are finally going to explain one of the great enduring mysteries. What the hell actually happened at the end of this crazy movie?
Roman: Oh, I definitely need that.
Roman: So, it’s been a while since you’ve seen “Trading Places”. Everything is going really well for Louis Winthorpe until his bosses, they have an argument about nature versus nurture and the evil Randolph Duke bets his maybe even slightly more evil brother Mortimer Duke that he can take away Louis’ job and his fiancée and his home and his friends and they can turn him into a criminal.
Robert: While at the same time, the Duke brothers take a con man from the street named Billy Ray Valentine, he’s played by Eddie Murphy, and they give him Louis’ entire life – his job, his home, his butler, and they try to turn him into a hot-shot commodities broker. It’s kind of a — you know, modern-day twist on “Prince and the Pauper.”
Roman: Eventually, the two guinea pigs, they find each other, and Louis and Billy Ray conspired to get back at the Dukes and they make a brilliant plan to make themselves really rich and put the Duke Brothers in the poorhouse at the same time.
Robert: It is a crazy, complicated plan that involves Futures Trading and commodities and cornering the market, and frozen, concentrated orange juice.
Roman: Right there, that’s my first question, frozen concentrated orange juice is central to the movie. And when I first saw it, I totally thought that was made up as a commodity just to be funny. In the real world, my thinking was, you would just trade oranges.
Robert: Sure, yeah.
Roman: Who would spend their lives trading little cans of frozen concentrated orange juice?
Robert: I found somebody, this guy.
Tom Peronis: My name is Tom Peronis and I’m a commodity trader. I’m just coming back from the floor of the New York Mercantile Exchange, where I, you know, spent the last four hours buying and selling orange juice options and futures.
Roman: It’s real!
Robert: It’s totally real! This guy does it all day long! So, Tom Peronis, he’s going to be our first expert on all things frozen and all things orange and we’ll meet our second expert in just a moment but we’re going to use both of them to fact check this premise that you had, Roman. That “Trading Places” basically could be a university-level course in finance and commodities. And as someone who explains economics for a living, I mean, this is my job. I take my hat off to the writers of this movie. Just listen to this scene. The Duke Brothers, in this scene, lead Eddie Murphy, Billy Ray Valentine, to a table, and set on that table is a beautiful breakfast.
Eddie Murphy: [As Billy Ray Valentine] No thanks, guys, I already had breakfast this morning.
Don Ameche: [As Mortimer Duke] This is not a meal, Valentine. We are here to try to explain to you what it is we do here.
Randolph Duke: We are commodities brokers, William. Now, what are commodities? Commodities are agricultural products, like coffee that you had for breakfast, wheat which is used to make bread, pork bellies which is used to make bacon, which you might find in a bacon and lettuce and tomato sandwich.
Robert: At this point, Eddie Murphy just deadpans right into the camera. I suspect that sometimes Planet Money listeners feel the same way when we’re explaining this to them.
Randolph: And then there are other commodities like frozen orange juice and gold. Though of course, gold doesn’t grow on trees like oranges. Clear so far?
Billy Ray: Yeah.
Bob: And reviewing the movie, they really, really did a good job. I mean, someone on that team knew what they were doing.
Robert: This is our second expert, Bob Lassandrello. He’s a commodities trader in Chicago. He used to trade cattle futures, like, Roman, you might find in a roast beef, cheddar and tomato sandwich.
Roman: Of course, if you watch that scene, you might think that these guys trade in physical things, the physical things that you see on the table – the bacon, the wheat, the cans of orange juice. But Tom Peronis says that in the orange juice market, that’s not quite right.
Tom: Yeah, it’s definitely not stored just in little cans. Yeah, they probably have large refrigerator-type units for them.
Robert: Wait, what do you mean probably? You buy and sell this stuff. You have no idea what it looks like?
Tom: No, and as a matter of fact, if you trade agricultural commodities, most commodity traders go their whole careers without ever seeing the physical product. I mean, I used to trade pork bellies and live hogs and I wouldn’t know a pork belly if it dropped on the table here.
Robert: Yeah, the reason Tom Peronis wouldn’t recognize a pork belly on the table is because people like him who do this in real life are trading contracts on pork bellies or technically, the future promise to deliver a certain amount of pork bellies at a certain time at a certain price.
Roman: What it really is, is it’s a wager. It’s a bet on whether you think something is going to go up or down in price and Mortimer and Randolph Duke in the movie, they make money whether it goes up or down.
Randolph: And the good part, William, is that no matter whether our clients make money or lose money, Duke & Duke get the commissions.
Mortimer: Well, what do you think, Valentine?
Billy Ray: Well, it sounds to me like you guys are a couple of bookies.
Randolph: I told you he’d understand.
Robert: I know this whole contracts thing may seem theoretical. But the bets are based on an actual contract about an actual, real thing. The traders just hold the contract for just a few minutes or a few days, enough time to make a little money. But before the contract expires, and the actual good has to be delivered, that trader needs to unload the contract, needs to sell it to someone who actually wants the thing underneath the contract, who actually wants the oranges, who wants the bacon, who wants the live cows. Remember, that’s what Bob Lassandrello traded in, live cattle futures, and he didn’t want a cow. He just wanted to make a bet on the future prices of cows. But, once Bob did screw up. Did you ever receive an actual cow?
Bob: Oh, boy, did I.
Robert: Did you really?
Bob: Yeah. Not a cow – 40 of them and more than 40.
Robert: You made a mistake.
Robert: You made a mistake and somebody called you on the phone and just said, “We have cattle here for you.” Where are they, on a truck or something?
Bob: Oh, yeah, or they’re in the pen. They’re actually off the truck and in the pen, it’s what it is. And so when the guys in East St. Louis Stockyards found out that a Futures trader took delivery on some cattle, they generally aren’t super helpful about — helpful, they don’t really give you a hand, letting you sell them. They kind of stick you with some extra fees and, you know, they don’t like us guy — they didn’t at then — at that time, like us guys sort of meddling in their world.
Roman: Now back to the movie. Billy Ray Valentine, who’s now called William Valentine by the Dukes, is learning this commodities world. And it turns out he has some talent for it because it’s not just about knowing the facts and the figures of the contracts and the commodities. A lot of it is about knowing psychology.
Randolph: Tell me just why you think the price of pork bellies is going down, William.
Billy Ray: It’s Christmas time. Everybody’s uptight.
Mortimer: Could we please, buy now, Randolph.
Billy Ray: All right. But if you want to lose money, go ahead.
Randolph: What are you trying to say, William?
Billy Ray: Okay. Pork belly prices have been dropping all morning, which means everybody’s sitting in their office and they’re waiting for them to hit rock bottom so they can buy cheap and go long. So people that own the pork belly contracts are going batshit cause they’re thinking, “Hey, we’re losing all our damn money, and Christmas is around the corner and I ain’t going to have no money to buy my son the G.I. Joe with the Kung Fu grip, okay? And my wife ain’t going to want to make love to me because I ain’t got no money, right?” So they’re sitting there and they’re panicking and they’re screaming, “Sell, sell!” because they don’t want to lose all their money, right? They’re out there panicking right now. I can feel it. They’re out there. They’re panicking. Look at them.
Randolph: He’s right, Mortimer. My God, look at it.
Billy Ray: I’d wait till you get to about 64 then I’d buy. You’ve cleared out all the suckers by then.
Roman: Of course, Billy Ray Valentine makes them a ton of money but Bob Lassandrello has this small quibble with this scene. He says people don’t really declare a particular price for a commodity. No one ever says it’s going to 64. They don’t really know exactly, but people make bets on whether things just go up and down.
Robert: Is that right?
Bob: Oh, absolutely.
Robert: Do people just have hunches that [cross-talk].
Bob: Absolutely. I mean, what would happen is, you know, there are guys who would just — you’d be standing around and you’d have to start to have a feeling that the market was going to go up or down and then you would trade accordingly. It’s sort of like, your brain processing all this information ends up manifesting itself as what’s called a ‘feel’ and then you buy or you sell accordingly.
Robert: So far, according to our experts, the movie “Trading Places” is nailing it. They have this commodities thing down pat, but then it gets a little Hollywood. Louis Winthorpe, our down-and-out rich boy, he teams up with his former butler and a prostitute with a heart of gold. We did not fact-check that one.
Roman: You don’t even need to.
Roman: It’s a given.
Robert: Exactly. Billy Ray, the con man-turned-trading savant, figures out, “Wait a minute. I’m being played,” and he joins up with Winthorpe and they hatch this plan to make millions of dollars and bankrupt the Dukes.
Roman: And it’s the end of the movie where I have my biggest questions. When I was a kid, I saw it and, I know that something important is happening on the trading floor at the end. That the underdogs win, they get rich, the Dukes go bankrupt but I didn’t really understand it and when I watch it again, the funny thing is I still don’t really understand it as an adult.
Robert: And, you know, before I joined Planet Money, I don’t think I would have gotten it either. But, I have now studied this movie over again. We’ve talked to the experts, and we are going to break this thing down. Because, Roman, if you were paying attention, this movie has already taught you everything you need to know about commodities and how to corner the market. Now, remember the orange juice that was in the breakfast scene?
Roman: Yes, frozen concentrated orange juice.
Robert: Okay. So in the movie, the Duke Brothers have bribed a guy to get an advanced copy of the — this never happens in movies, advance copy of the USDA orange crop report, which is a totally real thing. These crop reports come out every month. They tell you how much of a commodity is out there. Now, this, if they know it in advance, how many oranges are out there, they will then know whether the price is going to go up or down.
Roman: And that part I understand. The crop report is going to say that the supply of oranges is fine, that there’s plenty of good, cheap orange juice to go around.
Robert: Yeah, it’s a normal day in the market. Except our heroes are going to trick the Duke brothers. They’re going to pull the old switcheroo. So they slipped the brothers a fake crop report, a report that says, “Oh, my God, there was this terrible frost in Florida, lots of dead oranges.” The fake report would make any savvy trader know that the price of orange juice is going to go through the roof.
Roman: So the Duke Brothers think that the supply is low —
Roman: — and the price is going to go up.
Roman: And they’re willing to bet everything on it and they are so wrong.
Robert: They are so wrong. Our heroes, Billy Ray Valentine, and Louis Winthorpe, that’s the former trader who got screwed by the Dukes, they know the truth. They know that the orange supply is fine and they know that the price is going to go down.
Roman: So let’s bring back our OJ expert, Tom Peronis, and we’re going to watch this final scene together and get a play-by-play.
Robert: Our heroes, with their stolen insider information, our heroes are striding out onto the trading floor of the New York Mercantile Exchange.
Tom: There is my old place of employment.
Robert: That’s the World Trade Center.
Tom: Yeah, and that’s — I had an office in that building right there. That’s where the exchange was.
Roman: Inside, you see all the traders in their ugly vests gathering on this large floor, staring up at the clock.
Roman: And it’s pandemonium, Tom says this is exactly what it was like before computers. Maybe not quite so many people excited about frozen orange juice, but still.
Tom: It does make me nostalgic for floor-based trading.
Robert: Now, once again, Roman, you’ve got to keep all these things in your head if this is going to make sense. The Duke Brothers think there’s going to be a shortage of oranges because according to their fake crop report, the harvest will be bad, so prices should go up. They tell their guy, their floor trader —
Randolph: We want you to buy as much OJ as you can the instant trading starts.
Mortimer: Don’t worry if the price starts going up, just keep buying.
Robert: The price starts at $1.02 a pound, and as the Duke Brothers buy, the price starts to go up and up. They are bidding up the price of orange juice.
Roman: And the rest of the traders start to notice.
Actor 1: Hey, hey, the Dukes are trying to corner the market.
Jack Davidson: They know something, I can feel it. Let’s get in on it.
Robert: Okay. I got to tell you here, Roman, the actor who says, “They know something, I can feel it,” that is Jack Davidson, father of Planet Money’s very own Adam Davidson. And as Adam will say, it really is the most critical line in the entire movie delivered by his father.
Roman: That’s amazing.
Robert: But, it is actually important for the plot because everyone starts to buy oranges. The price goes higher and higher – $1.10, $1.20, $1.30. Everyone now thinks there is an orange shortage. The only problem is, of course, we know as the audience, that it’s based on a lie. So, Billy Ray Valentine, Louis Winthorpe stand quietly in the madness of the trading floor around them. They know the price is too high. They know it’s getting higher, and they know it’s about to collapse. And so, they want to do a little trick, you may have heard of called ‘short selling’. They want to sell orange juice while the price is high. So when the price hits 142, Dan Aykroyd looks up and he screams —
Dan Aykroyd: Sell 30 April at 142!
Roman: And I think this is a good candidate for the second most important line of the movie, with all respect to Jack Davidson, and I totally missed it. I’ve re-watched that movie again and again. I have no idea what he says there, what Dan Aykroyd says there. So we had Tom to explain.
Tom: Sell 30 April at 142.
Robert: What’s he doing?
Tom: He’s selling 30 Futures contracts at a price of 142 per pound. And there’s kind of a feeding frenzy driving the market higher but these guys have what they believe is the real information and they’re selling into that rally.
Robert: So selling into the rally means you think the price is going to go down.
Roman: All right, so I’m starting to get this. Billy Ray and Louis, they’re selling high. They’re selling orange juice to everyone who thinks that it’s going to go even higher than that.
Robert: Yeah. It’s a really tricky, fine point here, but I’m just going to out-and-out say this, you don’t have to own any orange juice in order to sell it because — I know, it’s weird! They are selling a promise. They’re selling — they’re saying, “I will promise to deliver you orange juice in April,” that was the April part of that, “And you will pay me this large amount of money sometime in the future.” Our heroes have until then to find some cheap orange juice and to fulfill their contracts. You’ve heard of the old saying, like, ‘buy low and sell high’.
Roman: Yes. That one I know.
Robert: It’s — it turns out, though — and this is the key to short selling. The key to the entire movie is you can do it the other way. You can sell high first and then turn around quickly and buy low, make a ton of money. And, our heroes are about to get to buy extremely low because the crop report, the real crop report, is about to come out and it’s kind of crazy because everyone on the trading floor just stops and looks at the TV.
Secretary of Agriculture: Ladies and gentlemen, the orange crop estimates for the next year.
Robert: And, I mean, this is obviously a Hollywood moment. Traders don’t really just stare at the TV and there’s not a long, awkward pause while the Secretary of Agriculture comes on.
Roman: This is dramatic tension, Robert.
Robert: It is. I think he’s putting on his glasses and everything.
Secretary of Agriculture: After calculating the estimates from various orange-producing States, we have concluded the following. The cold winter has apparently not affected the orange harvest.
Robert: Listen to that!
Roman: That sound you hear is a bunch of people who just realized that they’ve bet the wrong way. That there is no shortage, that the Dukes and everyone who bought with them, including Adam’s dad, now own a lot of very expensive orange juice, way too expensive. And now that the real crop report is out, the price is dropping. It’s 102, 96, it’s plunging to 72, 64. Everyone who bought high now wants to sell and cut their losses, and that’s driving the price down even further. It’s now at 46.
Robert: And remember, our heroes knew this was going to happen. They sold a ton of orange juice at a crazy high price and now the entire trading floor, including the Duke Brothers, the entire floor is begging to sell them orange juice for crazy cheap.
Actor 2: Selling!
Robert: Now, here’s where our heroes sit as the chaos clears. Other people have promised to buy orange juice from them at a price as high as 142 a pound, 142. And now minutes later, people are promising to sell orange juice to them as cheap as 29 cents a pound. Billy Ray and Louis get to pocket the difference.
Tom: It is a epic move, probably a significantly bigger one-day move than the orange juice market has ever had in its entire history. A purely fictional move, but, you know, enough to enable these guys to retire handsomely.
Roman: We had our commodities guys watch this pretty closely, but it’s hard to estimate just how much money Billy Ray and Louis made on this scam. We see the price of orange juice Futures, but not how many contracts. All we know at the end of the movie is that the Duke Brothers, they are bankrupt.
Robert: Yeah, they bought all of that orange juice when it was at crazy high prices. They bought high. And if and when they sell it, it’s going to be at terribly low prices. They did the opposite of what you need to do to make money in the market.
Roman: They lost nearly $400 million, and the way trading works, our heroes probably pocketed most of that money. And as for our villains, the Dukes, they get their comeuppance at the end of trading day.
Robert: Turns out they borrowed a lot of that money they’ve just lost.
Actor 3: Margin call, gentlemen.
Mortimer: Why, you can’t expect us to…
Actor 4: You know the rules of the exchange, Mr. Duke. All accounts to be settled at the end of the day’s trading, without exception.
Randolph: You know perfectly well we don’t have $394 million in cash.
Actor 5: I’m sorry, boys. Put the Duke Brothers’ seats on the exchange up for sale at once. Seize all assets of Duke & Duke commodities brokers, as well as all personal holdings of Randolph and Mortimer Duke.
Randolph: My God.
Robert: In this dramatic, crazy, clearly Hollywood ending, the bad guys lose everything. They get booted out of their rich positions in the market. This really happens sometimes according to Tom. He says people would borrow money, bet it all on a market move, and when it went the opposite direction they had to pay up.
Tom: Most clearinghouses had people who were referred to as leg breakers. You know, not — they weren’t like a real mobster, you know, leg breakers but they were the ones who would say, “All right, you know, time to pony up. All right, well, you know, we want your house. We want your IRA.”
Robert: It would happen right there on the floor?
Tom: That’s a little over-dramatized, but that would happen that day or the next day. You know, there wouldn’t be much of a time lag.
Roman: He said there’s one more unrealistic thing, at least in today’s world. Computer trading took over the commodities market. That climactic scene, if they remade the movie today, it would sound a lot like this.
Tom: It’s all people staring at screens today. You know, this kind of obvious drama is gone from the business.
Robert: It would be a very quiet —
Robert: — climactic scene.
Tom: The Duke brothers would be in their own private hell, you know, looking at a computer screen, head buried in their hands.
Roman: Tom Peronis says and this makes me very happy, that people still bring up the movie when he says he trades in orange juice Futures, and even among his fellow traders there’s a sort of reverence for the movie. That lines from the script have become part of the lingo of commodities trading.
Tom: Definitely some of these lines have become stock phrases, like over the years, especially in the OJ market. I’ve heard people say, like, ‘Sell Mortimer, sell Mortimer,” you know. “Duke & Duke is buying.” I’ve heard that too many times to count. Yeah, it’s definitely become part of the OJ lore.
Robert: Well there wasn’t much OJ lore —
Tom: That’s right.
Robert: — to add to, really.
Tom: Yeah, that’s right. There’s not much OJ lore in the first place but the stuff from ‘Trading Places’ makes up a significant chunk of it.
Robert: You know what Roman, I always assumed that this whole scam was illegal. Our heroes basically stole inside information. They essentially stole the crop report. And, they took all this money not just from the Dukes but from everyone in the market and at the end, they’re sitting on a Caribbean Beach and I thought, “Oh, they’re on the run from the law.” But, it turns out at that time, insider trading was not strictly illegal in the commodities market.
Roman: And that kind of makes sense because there’s so many people involved. If you are a farmer trading corn, you have this ultimate inside information about corn, and everyone in the agriculture business knows a little something that someone else doesn’t. But it’s the part where they steal the crop report that seems way, way over the line.
Robert: Yeah. Setting aside the actual theft of the suitcase which happens —
Robert: — in the movie. You shouldn’t steal —
Roman: Which is illegal in every respect. [cross talk]
Robert: You should not steal things. But the actual way in which they made money with stolen information, it turns out, that was legal. And I learned this because when Congress was coming up with the banking reform law, Dodd-Frank in 2010, they were debating what should be in the bill and not, and they came up with this special provision. It’s something that the Chair of the Commodities Future Trading Commission, Gary Gensler, he said, “We need this thing. It is called the Eddie Murphy Rule, a rule that will make what happened in ‘Trading Places’ illegal.”
Roman: And it made it in, it’s Dodd-Frank Section 746, which basically says, that a federal employee can’t leak information about the price of a commodity so that someone can make money off of it. And a person who gets that leaked information, they can’t use that to make money off of the market.
Robert: Yeah, Gensler said that before this rule went into effect, what Eddie Murphy – Billy Ray Valentine and Dan Aykroyd, Louis Winthorpe III – what they did, misappropriate information and then use it to corner the orange juice market, what they did was not actually illegal.
Roman: They got away with it.
Robert: They got away with it!
Roman: Oh, that makes me so happy.
Roman: 99 Percent Invisible, it’s Sam Greenspan and me Roman Mars. We are a project of 91.7 local public radio KALW in San Francisco and the American Institute of Architects in San Francisco.