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Gary Ginter: Ethics in the Commodities Market

Gary Ginter currently serves as a principal at Hull Trading Company, one of the world’s leading derivative options trading firms in stocks and stock indexes. Simultaneously, he is entrepreneuring a four-year-old firm called VAST (“Vapor, Air, Steam Turbine”) in fulfillment of a long-standing dream of perfecting and marketing a technology (invented and patented originally by his father) for better control of nitrous oxide pollutants generated by gas turbine combustion. From 1991 to 1993, he was the first managing director of Globex, a worldwide, all-hours electronic trading platform. Ginter is best known, however, for two other reasons.

First, from 1977 to 1990, he was co-founder and co-leader of Chicago Research and Trading (CRT), which came out of nowhere to become the industry leader. CRT was a spectacular entrepreneurial success by anyone’s reckoning. Second, few business leaders have so passionately and tirelessly given their time, expertise, and resources in support of church and parachurch efforts to bring a holistic Christian gospel (“good news”) to the needy of our world — not just to those in spiritual need, but to those in need of jobs, health care, and other necessities of life.

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Chicago Research and Trading Group, founded in 1977, had a meteoric rise to the top in its field. How did this happen and what role did technology play in CRT’s success?

Yes, and how did you get into the securities and commodities market? That seems like quite a different enterprise than your latest area of interest. How do you explain your business career?

Gary Ginter: Right out of high school, I went to Multnomah School of the Bible, intending to be a missionary in Latin America. But while I was there, I clearly felt God calling me instead to stay home and go into business. It wasn’t clear to me what business to pursue — just that I should stay home and serve God by going into business.

Soon after this, I was working my way through the University of Southern California, doing state-of-the-art pollution control surveys for my dad’s firm. A friend in the MBA program saw an ad in the USC student newspaper for a job doing international precious metals marketing research for a Los Angeles firm. Even though I was still an undergraduate, my friend convinced me to apply for the job, and I was hired. That got me into the trading industry; soon I hired my brother-in-law, Joe Ritchie, because I thought he had the gifts for great success in the trading industry. Indeed, that proved to be true! In 1975, we were transferred to Chicago; in 1977, we struck out on our own.

So you learned about the market on your own?

In those days, that was pretty much how you did it. There were no courses to speak of There were very, very few books on the subject. Today, there are probably hundreds of books, thousands of articles, and whole masters degrees in Trading and Markets! Things have changed!

Today, you can get your MBA in financial modeling and focus on using technology in the market, but there wasn’t anything like that back then. Did you invent your own approach?

Yes. When we began, options did not yet exist. After we had been in the industry a few years, options trading began. We got involved with options because of the unique capabilities of the key man in our firm, Joe Ritchie. Joe developed better algorithms and more accurate methods to figure out the theoretical fair value of any given option. For quite some time, CRT was way ahead of everyone else in the world in terms of theoretical values of options because of Joe’s mathematical and trading abilities. We were able to trade very, very large percentages of the transactions in the early days of most futures options on futures markets. In fact, there was a period of time during the very early days of futures options when it was not uncommon for CRT to be involved in 100 percent of the trades in some markets, as either the buyer or the seller. We didn’t hold all the open interest; we were just in and out, providing liquidity and a tighter bid-ask spread. I recall a conference at which a leading member of a New York firm was asked, “When is a new options market mature” He replied, “When CRT’s market share falls below fifty percent! Without CRT’s contribution,” he said, “futures option market would never have survived in Chicago.”

That is, options on futures. Options on stocks were started in Chicago by the Board of Trade with the founding of the Chicago Board Options Exchange — the biggest exchange in the world for stock options. We originally set out to sign up to trade options on the CBOE, but the paper work was so enormous and complex that we just threw up our hands and said, “Forget it, let’s trade futures instead.” That is why we went initially to the futures pits on the Chicago Board of Trade instead of the stock options floor on the CBOE.

What made CRT successful and enabled you to beat the competition? Was it that you saw an opportunity that others didn’t, and then were able to exploit it through better mathematical and trading skills?

Mathematical skills combined with trading knowledge. Seventy to eighty percent of CRT’s success was because of Joe Ritchie’s abilities as a trader. He is one of the greatest traders of all time.

What made him a great trader?

Humility. Extreme intelligence. Extreme mathematical orientation to things. Joe can trade off time versus value in his head as well as anybody I have seen. When it comes to analyzing the value of The IBTE Bulletin something in a new, untried area, Joe will be among the best. He is the kind of guy you want to be your point man in new trading territory. Others can come along behind him and work on the advanced theory and get it right to the third decimal point but Joe will have had it right to the second decimal point in two minutes while it might take them two years to figure out the third decimal point!

CRT started in April of 1977, and by 1987 you guys were the best.

We didn’t start trading futures options until October of 1982. Before that, we were silver arbitrageurs during the Hunt Silver Crisis era. We were in soybeans during the mid 1970s bean crisis. In the early ‘80s, we were bond market traders trading cash bonds versus future bonds, until a crisis shook Wall Street so deeply that our particular market niche dried up. That was when we decided to leave the financial futures market and focus on options. So, we had a variety of different trading vehicles prior to October 1982 when we got into options on bonds and options on gold. We were certainly among the biggest firms in the world in this business going into the crash of 1987.

Until the ‘87 crash, CRT’s annual growth was mindboggling. What was the impact of that crash?

The crash ended the growth of the option markets. It also took a lot of the wind out the sails of CRT’s key partners. They had made a lot of money and didn’t want to continue pushing the envelope so hard in a flat market. A year-and-a-half after the crash, basically the firm was up for sale. It was first sold to Mitsubishi Trust and Banking Corporation of Japan. Unfortunately, because we were also primary dealers in U.S. government securities at the time, the Federal Reserve had to approve the sale. They wouldn’t, so eventually CRT was sold to Nations Bank, and it became their capital market division.

Let me ask you about the morality of this type of money making activity. If you are manufacturing office furniture like Herman Miller, it seems you could go to bed at night and say, “Hey, I am making good money because we make the best quality, best-designed office furniture in the world.” When you went to bed at night after trading options, could you feel good about some beneficial service or product that CRT was giving to the world?

We had to face that ethical issue long before options, when we were trading futures. We believe that it is valuable to provide price transparency and price signals to producers and consumers of goods and to do this as early as possible to assure confidence that the future markets are genuinely value added. I believe this very passionately. It is extremely helpful for farmers to have indicators of relative value when they are making crop allocation decisions, such as how much acreage to put into corn versus soybeans.

Options allow, for the first time in financial history, a payoff pattern that is not linear. In most cases, if an asset goes up a buck in value, your profit goes up a buck. In options, that is not necessarily the case. Now you can craft very precise packages of components of risk. With great precision, you can sell the parts you do not want and keep the parts you do want. Never before could portfolio managers choose not to keep all of the financial results of a particular portfolio, but instead to get rid of, say, the tail risk, which is the most risky part of most portfolios. Portfolio managers can now express their degrees of bearishness or bullishness more efficiently than they ever could before. So, the market becomes much more fine-tuned in terms of just how willing people are to own this stuff right now, at these prices. It is a little bit like getting computerized controls on something that used to have only manual controls. It can be much, much more accurate, and you can afford to operate at a level of speed and efficiency that you could never afford before. Options put computerized controls into these markets, and those who prefer to fly manually don’t like the fact that they have to adjust or exit, but exit they will-one way or another unless they learn to fly faster! But if you tell farmers that they would be better off planting soybeans than corn, and then all the farmers plant soybeans rather than corn, it will backfire on them.

When a farmer makes the decision to plant x percent of soybeans instead of corn, if he is smart, he will simultaneously turn around and sell forward on the Board of Trade. This will cause the bearish implications of his crop planting plans to hit the market and affect the price that is being traded. The pit’s price is the best estimate we have of future value. Futures markets sometimes move absolutely oppositely of where everybody in the world thinks they will go. The market indicates to people whether they should be concerned about the price of something. A good example is in the days of the Gulf War — would the price of oil go though the roof? In fact, it dropped. When you see this happen, you realize that nobody is smart enough to know for sure what the price of some commodity will be in a year. So the best estimate emerges when people’s actual decisions are reflected in a centralized marketplace and an equilibrium price can be found. That is the best indicator we can build. It’s not perfect, but it beats whatever is second by a fair distance!

How has technology changed this business?

It made it much faster and much more efficient. Today’s options traders are worried about a single second. When we got into silver arbitrage twenty years ago, ten to twenty seconds might make a difference. Joe Ritchie made some innovations that immediately cut that in half; by the time silver arbitrage was at its peak I would guess that the reaction time was around two or three seconds at most.

If Joe was the genius trader/financial analyst, what was your role at CRT?

I was “Mr. Outside.” I was the guy who had the relationships with the exchanges, the banks, the government, and so on. I was the only guy to ever wear a suit at CRT! When we were thinking of going into a new area, I would be the first to snoop around and investigate the possibilities for our trading approach.

When CRT was founded in 1977, weren’t there about a dozen people on your team?

Actually, we began with only four partners and one other employee. Ultimately, we grew to about 750 employees.

I recall reading in the mid ‘80s that you had your own CRT cafeteria and tried to build community by letting your employees eat there for free. With such a frantic pace, how did you orient all your new employees, train them, and draw them into your culture and values?

Time didn’t allow us the luxury of being very systematic about all that. There was a lot of hands-on mentoring. As I said earlier, there wasn’t much to read that was helpful in learning this business. It had to be learned on the job, so we provided some basic introduction and then started someone as a clerk on the floor. Simultaneously, we would offer some skull sessions to teach the concepts and the math behind CRT’s approach. One of the things you have to deal with is the psychological damage to those who want so badly to be traders but don’t have the gifts. Traders are funny animals-very unusually wired people. Most traders, if you closed the Board of Trade tomorrow, would not know what to do for a living the next day.

Of course, there are many roles to be filled in making a successful trading firm. It was not just Joe Ritchie and our traders. A big part of the success of CRT was a deep-seated and genuine teamwork. We each brought different gifts and skills, and we supported and enabled each other to contribute. Again, Joe Ritchie set the tone for this team spirit and community. While Joe was the key person at CRT, there were probably a few hundred people who were essential to make it as successful as it was.

There were 30 or so partners. But there were many non-partner contributors who never got written up in any kind of article but who were very central in ways that even some partners didn’t recognize.

Would you describe yourself as an entrepreneur? Is that the constant between CRT, Globex, and now VAST?

That’s certainly part of it. Somebody is needed who can recruit the necessary people, money, technical, and legal resources. We need to identify the kinds of firms that would be good potential counterparts for deals. We need marketing expertise. I don’t have all this expertise, but I can find those who do. And then you need that kind of business judgment and instinct that comes from having made many, many mistakes before. For most of the issues that come up, I know at least one way not to do it because I have tried it before! If you look at the taxonomy of skills needed to start a firm, it is a myth that any one person has all those skills. Entrepreneurial leadership requires a blend of skills. There will always be a first among equals, but if you do not create a culture that enables people to grow and contribute broadly, your growth will be severely limited.

It seems to me that the business that you were in is fraught with potential ethical difficulties. How did you deal with those?

We had to think about such challenges carefully and in community. Isolation could result in big mistakes. We tried to broaden our inputs, our models of understanding and action, and read widely. At some point, though, you have to go with what feels right in your gut. If God’s Spirit is within you, the best indication of what you should do may not come from your brain but from your gut feeling. This is like the difference between a trader and an academic. A trader will make a trade within the first few seconds of opportunity — while an academic might want to study it first for a few days. Ethical decisions often require our attention earlier rather than later; our heart has to lead us rather than deferring to our brain for extended study.

Did those ethical challenges change at all as the pace of your business speeded up and twenty-second decisions were replaced by two-second decisions?

I don’t think so. There were issues that had to be addressed, but they were technical rather than ethical in nature. For example, after the crash of 1987, we asked whether ‘circuit breakers’ should be installed in the market. Everybody agreed that we should not allow markets to get out of control again. But this was a technical issue, not an ethical one.

The ethical issues in the marketplace have much more to do with money and power than with other things. Market makers live and die in terms of money, and money is a very powerful force on the soul. It is something very few people handle well. The greatest stress on partnerships is over money, and probably more so during times of success than in times of failure. These ethical issues are pervasive and pernicious. We need to stay rooted and stay in community. Without self-control, we will soon feel broke at $1,000,000 a year — when we used to get along on $20,000 a year! Money is one of those things that don’t have a satiation effect the way some other things do.

Greed has to be at the top of my list of ethical concerns. How do you motivate organizations to restrain their greed for the good of society? Greed has no restraint or limit in the Board of Trade, for example, except for other people’s greed, the marketplace mechanism. The problem is shortsightedness and an insufficient sense of stewardship.
The individual’s pocketbook is as far as they can see. If you don’t have a sense of stewardship guiding the product or service you are providing, your decisions will be for short-term profit. But, as Peter Drucker has said, the purpose of an economic enterprise is to provide valued goods and services and break even in the long run.

But institutions cannot do what leaders can do. Max DePree has said that a leader is a person who takes pain for other people. Institutions don’t do that well, so the challenge we are left with is how to be good leaders. How can we help business institutions make changes from patterns developed over centuries? How can we show the way to a business that is more efficient, less expensive to customers, better integrated with their needs, and more profitable in the long run? How do we help the casualties of the transition survive and make adjustments? How can we do this in ways that are both tough minded and grace-filled? Those ethical issues are always with us — always have been, always will be!

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