Jim Marzano – The History of Financial Futures

Jim Marzano - The History of Financial Futures
Thom Thompson

Thom Thompson

Editor

Broker and Trader of Financial Futures at CBOT Shares Tales of Early-Day Hiccups

Jim Marzano thought he was going to be a grain merchandiser at Stotler Grain. Instead, he ended up being a broker and a trader at the Chicago Board of Trade. In fact, he made the first trade in the 30-Year Treasury bond futures pit at the CBOT.

In this video interview by Thom Thompson, Marzano shares some reflections of his favorite days on the exchange and about the volatility of the bond market after the 1987 stock market crash. He talks about the first delivery in Ginnie Mae (GNMA) futures, which almost doomed financial futures.

His favorite day was the day Ronald Reagan was elected as U.S. president in 1980. The bond market moved 3 points higher, which was limit up, on rumors of the election results. Marzano said he did something you are not supposed to do –  he sold the market limit up. Then he walked off the floor for 20 minutes.

He talks about the volatility in the bond market after the 1987 stock market crash in the night bond session at the Chicago Board of Trade. Cash bonds were 6 points higher. 

Marzano ran the new-member seminars at the CBOT for several years and he talked about the chance of traders’ success on the trading floors. 

He also said he was amazed by the number of brilliant people on the floors of the CBOT. 

He stopped trading in 1998 to work on other projects related to the markets.

He was an early user of computers at the CBOT. His firm had to leave the building where it was  located because it could not give his firm enough electricity and cooling for the computers

He walks us through the story of the first delivery of GNMA futures and how it was almost a failed delivery. There were three grain firms that were the major clearers of financial futures at the Chicago Board of Trade in the early days. Each of the firms had about $60 million to $70 million in open interest.

The delivery day for the GNMAs was Christmas Eve, so the exchange closed early.

The GNMA collateralized depository receipt was basically a warrant backed by GNMA certificates. The buyers of the GNMA who wanted to take delivery said they needed the specific pool numbers underneath the warrant, but that information was not available. The buyers told Marzano they could not make the delivery versus payment without those numbers.

None of the firms had taken delivery of GNMAs before. The decision was made by Marzano, Peter Todebush and Richard Sandor to take delivery of the warrants as they would a botched grain delivery, to the firm. All the certificates were held at the First National Bank of Chicago. 

But there was the issue of paying for the deliveries. Because this decision was being made at 11:30 a.m.,there was no time to get the necessary permission to get the funds. They were told by the chairman of the First National Bank of Chicago to take an overdraft for the difference. 

Thus Marzano took out a $30 million loan over the weekend that he had no authorization to take. But such were the necessary actions in the early days of financial futures at the CBOT. He knew the First National Bank would stand behind the CBOT because it was one of the clearing banks for many of the firms.

Those early lessons made it much easier for the subsequent creation and trading of the 30-Year Treasury bond futures. The math was more straightforward and the learning curve was much easier than for mortgage-backed securities.

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