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To: AllansAlias who wrote (1933)	7/4/2000 10:35:17 AM
From: JHP	Respond to of 436258

ho ho ho June 30, 2000 FLOYD NORRIS Let's Take a Flier: The Return of Mega-Leverage to Stocks -------------------------------------------------------------------------------- Previous Columns • Crude Error: How We Grew Vulnerable to High Oil Prices (June 23, 2000) • Asleep at the Books: A Fraud That Went On and On and On (June 16, 2000) • Through The Looking Glass: Europe Raises Interest Rates (June 9, 2000) Forum • Join a Discussion on News From the Markets -------------------------------------------------------------------------------- ack in the good old days, before there was a Securities and Exchange Commission and before the 1929 crash and the Depression that followed had given speculation a bad name, a plunger didn't need to actually buy shares to get all the excitement of the stock market. He or she could go to bucket shops, which offered the ability to bet while putting up hardly any money. Unlike the real brokerage houses, which wanted a buyer to pay 10 percent or 20 percent of the stock's price to buy it, the bucket shops would let you "buy" a $100 share for a dollar. A quarter of that dollar was a commission, and the rest was the margin. So if the stock fell 75 cents, your margin was wiped out and the dollar was gone. But if the stock went up and you got out, you could make money. Few did. "The business was tremendously profitable," wrote Edwin Lefevre in his 1923 classic, "Reminiscences of a Stock Operator," a fictionalized memoir of the life of the speculator Jesse Livermore, who got his start in bucket shops. "When it was conducted legitimately -- I mean straight, as far as the bucket shop went -- the fluctuations took care of the shoestrings. It doesn't take much of a reaction to wipe out a margin of only three-quarters of a point." Bucket shops eventually gained a bad reputation. But they were widely viewed as legitimate in the 1920's, even though speculators never really purchased stock. Now the basic idea is back, albeit under a fancier name. The futures markets want to trade "single-stock futures," which in economic terms are virtually identical to stocks. This week the House and Senate Agriculture Committees unanimously approved bills to allow such trading even though many regulatory issues remain unsettled. Once they become legal, you will be able to buy single-stock futures by putting up pennies on the dollar, in sharp contrast to the stock market, where you have to put up half the purchase price. The potential appeal is obvious. Not unlike the old bucket shops, futures markets have intraday margin calls. If your stock future declines, you must put up more cash immediately or be wiped out. Futures in commodities like wheat make sense because they allow for trading and price discovery without the need to ship millions of bushels of wheat. The advent of stock-index futures provided a way to hedge risk on broad baskets of stocks. Single-stock futures offer little more than a way to gamble on the cheap. The futures markets talk of single-stock futures as providing "additional risk management tools," as Scott Gordon, chairman of the Chicago Mercantile Exchange, put it in an interview. They say that you can already duplicate a single-stock future with a complicated trade in the options market, so why worry? The idea that stocks are inherently risky, and that the government should keep people from speculating with excessive leverage, seemed obvious in the 1930's. Then people thought the 1929 crash had been worsened because over-leveraged investors were forced to sell. Seven decades later, such things are forgotten, and free-market advocates claim that if we don't allow such blatant gambling on stocks, the action will simply go to some overseas market. It is probably inevitable that single-stock futures will begin trading. But legislators who are voting in favor of them may regret that decision if, before they choose to retire, the public once again discovers that the stock market really is risky, and that very high leverage can increase the risks for both the speculators and the entire system. Ask questions about Personal Finance, Entrepreneurs, and more. Get answers and tell other readers what you know, in Abuzz, new from