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D
avid stepped out into what looked to be a lounge, with a restaurant off to his left and an outdoor patio located through a pair of glass doors straight ahead. There was a long wooden bar off to the right, complete with bar stools and a great pyramid of liquor bottles inside a huge glass cabinet. The lounge, restaurant, and bar area were all decorated in muted colors, with leather-lined chairs and sofas, elegant carpeting, and oil paintings on the walls. The decor was in stark contrast to the garrulous traders who crowded together in cliquish groups, different-colored jackets congregating in different corners of the L-shaped floor. Even though trading was in full swing downstairs on the trading floor, there were obviously enough traders taking breaks to give the upstairs lounge the feel of a rowdy downtown bar.

As Reston led David through the throngs, he got a few sideways glances, but mostly the traders continued with their conversations. David caught snippets of their dialogue; he wasn’t trying to eavesdrop—it was just that the traders talked so damn loud, probably a consequence of days spent screaming at each other down on the trading floor. He passed one group talking about
a weekly poker game with stakes so high David could hardly believe it was real. Another group was talking about where they were going to go when the trading day ended; David caught something about some sort of club that employed women who danced in cages.

Reston took a seat at a small table by the windows, with a pretty good view of the river and New Jersey beyond. David sat across from him, trying to look comfortable as he sank into the leather chair. David could see tugboats churning through the gray waters eighteen floors below. He wondered how many kids in Harvard ties bobbed up and down in their wakes.

“So how basic do we have to get?” Reston asked as a waitress brought them each a beer in a tall, frosted glass. “I know this is your first day, but where do we need to start? You know what an exchange is?”

David wondered if it was a trick question. He thought back to the analogy Reston and Giovanni had given him at Morton’s—that an exchange was like a soccer stadium. To be honest, he wasn’t entirely sure what that meant. If this had been a class back at Harvard, he would have tried to bullshit his way through. Instead, he decided to table his ego for the moment and let Reston lead him wherever the Texan wanted him to go.

“A place where traders come to trade,” he responded, as simply as possible. “Here they trade oil.”

“Wonderful.” Reston sighed, taking a long swig from his beer. “So that’s what two years of business school comes down to.”

David felt a bit of heat rising into his cheeks, but quickly pushed his emotions away. For the moment, he was here to learn; he’d have a chance to prove himself as time progressed. Still, a little attitude never hurt anyone.

“Pretty much. I also know that oil is what makes cars go fast, but I figured I’d save that for my second day.”

Reston looked at him, then grinned.

“Okay, the basics it is. Yes, you’re right, exchanges are, as the name suggests, meeting places for people to trade goods for
other goods. Historically, exchanges sprang up near ports, where people naturally gathered together with whatever wares they had to hock. The gathering together was important, because being face to face restricted the ability to get screwed; when you could see the transactions going on all around you, you had a sense for what the market rate was, and therefore it was less likely you’d get taken for a ride.”

David nodded; it was all pretty seventh-grade textbook, but he didn’t want to rush Reston. The chaotic scene he’d witnessed downstairs on the trading floor seemed terrifyingly complex, and he didn’t want to skip any steps that would help him make better sense of how the Merc operated.

“For a long time,” Reston continued, “exchanges traded in the physical—‘spot’—market. That means, in the immediate transfer of goods for goods. I give you a sack of potatoes, and in return you give me money. Now, that worked fine for commodities with short shelf lives, but as you moved into things that you can store—such as, well, oil—you wanted longer-dated purchase agreements. That’s where futures come in.”

Of course, David had learned about futures in business school. They were pretty self-explanatory: you contracted to buy or sell items in the future at a price determined now.

“Sure,” David said. “I agree to sell you one gallon of crude oil in one month for fifty bucks. The current price is forty nine. You believe the price is going higher, so you agree to the deal. I think the price is going down, so I also agree. If, in one month, the price is below fifty bucks, you lose and I win. If it’s above, you win and I look for another job.”

Reston leaned forward over his beer. “And what if that month goes by, the price of oil tanks to forty bucks, but I say, fuck you, and refuse to pay you the difference? Well, that’s where the exchange comes in. The exchange acts as insurance to make sure the deals go through smoothly. For that service, the exchange takes a clearing fee and a trading fee. The more oil that gets traded, the more money the exchange makes. But the brilliance of the whole
thing is that the exchange doesn’t take any of the risk—the risk is all on the traders. They’re the ones speculating on the price, deciding whether to bet that whatever they’re trading is going up or down.”

“So the exchange is like the house, the casino,” David said, parroting back what he’d heard Reston say earlier. “The traders are the gamblers.”

Reston nodded. “Though it’s a little more complex than that. As the markets developed, got bigger, faster, and more complicated, brokers stepped in—guys who made it their business to control the transactions for a commission. The brokers represent the people selling the oil as well as the people buying it. The brokers interact with the traders, who are essentially speculators who squat in between the buyers and sellers. A barrel of oil being pulled from the coast of Louisiana—destined for your car’s gas tank—can change hands dozens of times along the way as various people take different views of the short-term price direction. That one barrel of oil, which we’ve bought and sold for fifty bucks, can actually generate thousands of dollars of profit and loss for people in the middle before it gets turned into exhaust.”

Somehow the basics had gone from seventh-grade textbook to somewhere in the stratosphere, but David was sure he’d get the knack of it all before long. At least, he hoped so; he doubted Reston was the kind of guy who liked explaining things more than once.

“And that’s what you saw going on down there in the pit. All that yelling is actually coordinated communication. Signals being passed between traders that communicate the prices and sizes of crude oil contracts—buys and sells—based on whatever speculative magic each individual trader brings with him to the floor. Been going on like that since 1983, when crude took over as the main commodity of the Merc. Before that, it was potatoes. Before that, butter and cheese. That’s right, the Merc opened in 1872 as the Butter and Cheese Exchange of New York. After World War II, potatoes overtook dairy—and in ’83, oil trumped
potatoes. But even though the commodity that’s being traded has gone from butter to oil, the traders and exchange haven’t changed much in a hundred and thirty years.”

David leaned back in his chair. The madness he’d witnessed downstairs had been going on for more than a century. And now he was going to be a part of it all.

“If you haven’t quite figured it out yet,” Reston continued, nursing his beer, “there’s a real divide between the board and the traders. It really boils down to the age-old antagonism between workers and management—between the guys who feel they make the cars, and the guys who wear suits and take credit for making the cars. The traders trade, and we make money off of them—and they hate us for it, even though most of us were once floor monkeys just like them. Part of your job is going to be bridging that gap—so you’ll be spending plenty of time up here. This is where the upstairs guys and the downstairs guys come to relax. If you can call it that.”

David finally turned away from Reston and watched two young traders—maybe late twenties, maybe even younger—shoving at each other back near the bar. A third trader intervened just before punches started to fly. David pictured the trading floor downstairs, how all the guys were jammed together, screaming and yelling—Christ, it really did seem insane that an exchange could work this way. David really felt like he had been plunked down in some bizarre nightmare from his youth, surrounded by the tough kids he had grown up with—who had simply traded in their jeans and leather coats for colored trading jackets.

“You guys weren’t kidding about the ethnic connection here,” David said, thinking back to the night at Morton’s.

“It’s the culture of apprenticeship,” Reston replied, taking a deep swig from his beer. Even though it was barely ten in the morning, David followed suit. He didn’t think he’d be getting much work done on his first day, considering that Giovanni wasn’t even in the office. Not that he had any real idea what he’d be doing day to day anyway.

“Like I said,” Reston continued, “it’s been going on for more than a hundred and thirty years. Traded down from father to son, almost forever. A real family business. Like we told you, you can’t just walk into the Merc and try to get a job. And even if you did, you wouldn’t survive without a mentor. It isn’t something you can learn at Harvard Business School. We’ve all seen it before, the Ivy League kids who hit the trading floor and fall completely apart. You have to have the heart to do this, as well as the mind.”

David nodded. Reston really seemed to have a stick up his ass about David’s degree. Maybe Reston was letting him know that he wasn’t going to get any special treatment—that just because he was Giovanni’s newest kid, that didn’t make him a de facto star. Or maybe Reston simply didn’t like him. Either way, David knew he was going to have to work to earn Reston’s respect.

Their conversation was interrupted, briefly, as the two traders who had shoved each other a few minutes ago went at it again. This time one of them had to be pulled away by two others in similar bright blue jackets. David heard at least one ethnic slur in the shouting that followed—but it was one Italian talking to another, as far as he could tell, so it didn’t go any further than that.

“Christ,” David said, only half-joking, “I might need to bring my boxing gloves if I’m going to be spending a lot of time with the traders.”

Reston shrugged. “The Merc is a real physical exchange, a street fight. Trading on the Merc truly does involve physical confrontation. There are real bodily limitations to the floor. Where you stand—being closer to certain traders looking for certain positions—can mean the difference between millions of dollars. Fistfights are not uncommon, downstairs or up here. Certainly, pushing and shoving is a daily thing. There’s one trader, Bobby Maroni, a little guy, maybe sixty years old and shrinking every week, who has two clerks paid to actually stand behind him, holding him in the pit so he doesn’t get tossed out when things get frantic.”

David laughed, then realized Reston was serious. It was
amazing to think that a modern exchange worked this way—men physically fighting for space as they traded millions of dollars worth of energy futures. And further, that this seemingly archaic battle had far-reaching implications, because at its heart was the price of the ultimate commodity.

“See, but it makes sense,” Reston continued, as if reading David’s thoughts. “Oil is volatile. To trade oil, sometimes you have to be equally volatile. The traders on the floor are working with millions of dollars per day. And sometimes they don’t hold their positions very long at all—some hold for only a few seconds, others a few minutes, while some hang on overnight. And the price is always changing. And not just little changes like with the stock market—huge swings that seem to come out of nowhere. So these guys, they’re really gamblers at heart. The biggest gamblers in the world, playing in the biggest casino you can find.”

“Why does the price of oil change so much?” David asked, hoping it wasn’t too stupid a question. Reston seemed happy to answer—maybe happy that the Harvard brat had realized he had to ask questions, because this was as foreign to him as Harvard was to most of these guys from Brooklyn.

“Most of our oil comes from certain specific regions of the world, while the demand is ubiquitous. A variety of triggers can vastly affect the price. Hell, you know what one of the most influential triggers is to the price of oil?”

David’s first thoughts were war, maybe unrest in the Middle East. But then it dawned on him—something much more commonplace probably had a much bigger effect.

“The weather?”

“You win another beer, whiz kid. Yeah, the weather is enormous here. In the traders’ offices, they’ve got it on their TV screens all the time. They even have a meteorologist on staff.”

Intuitively, David realized, it was easy to understand: A cold front hits Manhattan, and suddenly the demand for oil skyrockets. The trading floor becomes a churning mob scene as the traders take advantage of the price movement, and the volatility
increases, building on itself. Millions of dollars are made in minutes, sometimes seconds.

“So when the weather goes crazy—”

“This place turns upside down. Funny story. About four years ago, when I was still trading full-time, I was at a rehearsal dinner for my niece’s wedding. Cute girl, Fiona, my older brother’s kid. Anyway, I was about to make a toast when I caught sight of a TV in the background. A hurricane had just earned its name, and the weatherman was predicting that eventually it was going to hit the Gulf. Everyone else at the wedding was laughing and smiling, but I was fighting back tears. I was in a deep position on crude, and I was going to lose millions.”

David shook his head, laughing. He tried to picture Reston as a trader. The Texan, as tough as he was, seemed so much more refined than the guys in the jackets who surrounded them. David’s eyes searched through the crowd, trying to see if there was anyone Reston might have fit in with—and noticed a table about twenty yards to their right, close to the glass doors that led out to the patio. The table was surrounded by a half-dozen young men in jackets with what looked to be zebra stripes, all standing while they drank from frosted mugs. Only one trader was seated, his feet up on the table as he leaned back, arms clasped behind his head. He was older than the rest—in fact, maybe even as old as Mendelson and Giovanni, certainly late fifties, maybe closing in on sixty. His hairline was receding, a ring of wispy, silver-gray locks sticking up behind his ears like some sort of demented halo. He had dark rings around his eyes and thick, chalky lips, clamped down around a cigar. Nobody else seemed to be smoking indoors, though the outer patio was obviously smoke-friendly. But this guy seemed somehow above the rules. And it wasn’t just the cigar that gave David that feeling—it was the way the younger traders milled about him, not just the guys in the zebra jackets that matched the old man’s but the other traders as well. As an Italian, David had been trained to recognize the signs of that sort of respect from a very young age.