Crime in the Pits: The Regulation of Futures Trading

In the late 1980s, the Federal Bureau of Investigation initiated an extensive undercover investigation of trading abuses in the two largest futures exchanges in the United States. Though the investigation received widespread media attention, the nature and significance of the crimes involved remain unclear to many people, largely because of the complexity of futures trading itself. This article describes the organization and operation of futures markets and provides an account of the offenses targeted by the investigation. Two structural components of futures trading, dual trading and the openoutcry system, criticized as offering ripe opportunities for abuse, are examined in detail. Finally, efforts at reform can be understood only when set within the context of organizational forces and pressures acting on the futures exchanges and the agencies responsible for regulation. In particular, the changing world market and competition for regulatory jurisdiction are offered as guides for understanding reform efforts.