California a Hot Spot for Futures Trading
Are Californians bigger risk takers than investors in other parts of the country?
It appears so when it comes to futures trading. The state is home to the largest number of individual speculators who are, in effect, betting on the future price of anything from Treasury bonds to pork bellies, according to brokers.
“There are more speculators out here,” said Lee R. Brooks, first vice president and manager of the futures department at Bateman Eichler, Hill Richards. He has been in the business 25 years, half of it in the Midwest, the rest in California.
The concentration of speculators in California was first studied in a 1983 survey by the Chicago Board of Trade, which along with the Chicago Mercantile Exchange has recently been rocked by an FBI probe into possible trading fraud.
The Board of Trade study showed that retail traders in California made up 11.9% of the all speculators who traded futures contracts in United States. (In comparison, California accounted for only 9.9% of the total U.S. population.) The second-largest concentration was Illinois with 6.5%, followed by Texas with 6.4%. New York came in fourth with 5.8%.
‘Different Economy’
The California penchant for futures trading reflects both the wealth of residents and their derring-do attitude toward making and spending money, according to brokers and traders.
“There is a different sort of economy out here,” Brooks explained. People in the Midwest and East often have roots going back many generations, he said, and they tend to be more conservative and adhere to the status quo. “Hell, everybody has lived there forever. They think we’re still new folks out here.
“The ones on the West Coast are the movers. They are searching further for a frontier. . . . In California, there are those who are still building their fortune or fame. . . . We’re more risk takers,” added Brooks, whose firm does 99% of its business in California.
“If I call 10 people in Los Angeles and New York, I always get more receptivity in Southern California than in New York City,” says one Los Angeles broker who has clients all over the country. “It’s a cultural thing. New York City is more stock-oriented. They’ve had the stock market there longer. The futures market is a Western tradition, mainly in Chicago, mainly among farmers. California is Western.
“Newer things start in California; we are more receptive to new ideas. Southern California attracts the more aggressive, get-rich type of mentality. That’s kind of the appeal. The stock market is get-rich-slow, the futures is get-rich-fast. . . . If you’ve got the money, you want to live in Southern California because of the weather. The money that wants to make money is here.”
The broker, who has worked in the Midwest, added: “To this day, when I tell my colleagues in the business in St. Louis that I moved to California, they say: ‘Boy aren’t you lucky. You can make a lot of money there.’ ”
Younger, Wealthier
Nonetheless, Farm Belt states such as Kansas, Nebraska, Iowa and the Dakotas boast high concentrations of speculators, relative to their population, but they tend to deal in agricultural futures for products such as wheat, corn and soybeans. These are the states, after all, where such products are grown.
Futures traders in California tend to be younger and wealthier than speculators in other parts of the country, according to brokers and traders. “They usually are more mobile and aggressive in personality and life style, almost flamboyant,” said one Orange County broker, who added that the typical California trader is partial to financial rather than agricultural futures.
These perceptions of wealth in California have led to some unsavory dealings. “People make and see people making money quickly,” said a regulatory official who is familiar with these markets. “Consequently, they are most susceptible to claims of highly speculative investments that will make them income quickly.”
Until a federal crackdown last year, Orange County was a hotbed for “boiler room” operations that sold futures contracts over the phone. Many of these operations duped investors into buying bogus futures.
But the recent unfolding of the FBI probe of the Chicago commodities markets appears to have caused little concern among speculators in California. “I have had exactly three calls” about the Chicago scandal, said Brooks, whose firm handles hundreds of accounts.
