A Christmas Movie that Led to a Financial Reg (Sort of)
Trading Places is a Christmas movie in that it is set during the holidays and I suppose making hundreds of millions (or probably billions in today’s dollars) is a 1980s Christmas wish as compared to other Christmas wish movies. It is a heart-warming story of a young Eddie Murphy and Dan Akroyd taking on the entrenched elite by, oh well, by insider trading. The ending and the glory of frozen concentrated orange juice live on. First the full explanation of how the two manage to out maneuver the Dukes is a little tricky. But after the thirtieth anniversary a two years ago, a few places explain it nicely. NPR’s coverage is succinct. Business Insider is good and has better pictures. But the best is from Don’t Worry I am an Economist which has a step-by-step on short selling, and then applies it to the movie including explaining how the pricing worked (142 is in fact A $1.42 and 29 is $0.29 per pound but the contracts are for thousands of pounds thus “Trading begins at 102 cents per pound (at 15,000 pounds of F.C.O.J. per contract – size of a typical contract – the value of a single contract is $15,300).”.). So he shows that
How much have they made? Let’s see. In the movie Winthorpe says they’ve moved around 20,000 contracts. Assuming they’ve sold short at a constant pace from 142 down to 102, and that later they’ve bought them back while the price was falling from 46 down to 29, let’s say that the average sell price was around 122 cents per pound, where the average buy-back price was 37.5 cents per pound. The spread is therefore 122 – 37.5 = 84.5 cents per pound profit. Per single contract this is 15,000 pounds * 84.5 cents per pound = $12,675 per contract. Multiply this by roughly 20,000 contracts and their total profit was: $253,500,000.
Oh and here is the law and regulation part: The movie was explicitly invoked as the Eddie Murphy rule when the government finally made insider trading on the commodities market illegal. Per the WSJ when the rule passed CFTC Chief Gary Gensler explained:
We have recommended banning using misappropriated government information to trade in the commodity markets. In the movie “Trading Places,” starring Eddie Murphy, the Duke brothers intended to profit from trades in frozen concentrated orange juice futures contracts using an illicitly obtained and not yet public Department of Agriculture orange crop report. Characters played by Eddie Murphy and Dan Aykroyd intercept the misappropriated report and trade on it to profit and ruin the Duke brothers. In real life, using such misappropriated government information actually is not illegal under our statute. To protect our markets, we have recommended what we call the “Eddie Murphy” rule to ban insider trading using nonpublic information misappropriated from a government source.
Law and lit and reg I guess. Anyway Merry Christmas and in the words of Nenge Mboko “Merry New Year.”