It's late afternoon at one of Wall Street's biggest investment houses, and after a moment of silence, the crowd roars, traders leap up from their computers, and everybody exchanges high-fives. Has the Dow jumped another 500 points? Nope. Ty Shine just scored a winning three-pointer for Seton Hall. As March Madness compels office workers to compete in NCAA betting pools, nowhere are the stakes higher than on Wall Street's trading floors, where hundreds of thousands of dollars in undeclared income will trade hands over the next week -- and the biggest bettors may have to jet to Vegas to lay off some of the risk.
NCAA pools originated in the mid-eighties and were quietly tolerated until a national Super Bowl pool that started on the Chicago Mercantile Exchange and involved the NYSE reached $1 million in the early nineties. Top brass at many firms launched crackdowns -- the chairman of Lehman Brothers even fired off a memo declaring involvement in the NCAA pool a fireable offense. But the pools seem to be back with a vengeance: "Everybody's a sports fan," says one trader, "and gambling is in our blood." During March Madness, trading-floor televisions are tuned to basketball all day, and fanatics have been known to call in sick or schedule vacations around games.
In a typical setup, an organizer writes down the names of all 64 teams, ranks them, and throws them into a hat. Participants buy in at a fixed amount -- say, $1,000 a team -- and to even the odds, those holding lower-ranked teams get handicaps. Should they face a favorite in the first game, they merely have to cover the spread -- lose by less than a given number of points -- to "capture" the higher-ranked team and advance to the next round. At the end of the playoffs, the person holding the winning team takes home the entire pool, in this case $64,000.
You've got to love these Wall Street guys, though; they want to make more. So they bet on the losers, too, "shorting" teams for thousands of dollars, often multiple times. Older traders swap war stories of staggering losses and whisper that some of the biggest investment houses have bailed out employees who couldn't pay up. One bond trader says he has never forgotten the fate of a former co-worker from Merrill Lynch who, in 1987, shorted ten Syracuses at $5,000 each. The trader stood to make $50,000, but if Syracuse won, he would have to pay out the entire price of the pool ten times -- for a total of $640,000. When Syracuse made it into the final game against Indiana, the panicking trader was the talk of Wall Street. Right before the last game, his managers forced him to buy back the now significantly more expensive Syracuses. In the final minute of the game, Syracuse lost. The trader was out $150,000, and Merrill Lynch came down hard on open betting.
But who can stop traders from doing what they do best? In addition to betting on winners and losers, they "make markets," buying, selling, and trading teams as though they were stocks. As teams are eliminated, the bidding reaches fever pitch; people pay huge amounts to acquire a team they think is going to win. Traders act as bookies, putting together bid offers and shouting out commentary on the trading floor: "The current market for Duke is 12 bid, 13 offer!" During the NCAA playoffs, P&Ls -- profits and losses -- are known to drop significantly as traders spend entire days working out probability sheets for their teams. One options trader describes it as a "de facto little exchange that exists for about a week," similar to the futures trading on public exchanges worldwide. Actual sports fans are completely overwhelmed, says one bond trader, by the "friggin' bracket-dollar-based hootin' and hollerin' for whoever's gonna win the money."
Not all of it is fun and games: Traders are still talking about the pool two years ago, when a clerk on the NYSE floor shorted a bunch of Kentuckys at $2,000 each. As Kentucky advanced through the playoffs, he didn't cover his losses, just hoped and prayed and let it ride. Kentucky won, and the clerk owed $200,000 on a $25,000 salary. He paid a single installment with money borrowed from his father before disappearing. "The moral of this story," sighs one rueful equities trader who is still owed $4,000, "is to know your counterparty."