Wal-Mart Offers In-Store Futures Trading

Sept. 21, 2006
WALVILLE, ARK.–Representatives of the Wal-Mart corporation on Friday opened the first of many planned in-store trading ‘pits’ for the buying and selling of futures contracts on more than 1,100 consumer and household goods carried by the retailing giant. “This is about injecting some new excitement into the shopping experience,” exclaimed Wal-Mart VP of Marketing William Foursby. “It’s about capturing some of the energy of a bazaar, of an open marketplace, and, at the same time, extending our value chain that last mile to our retail customers.”

Futures–agreements to buy or sell a quantity of a commodity at a future date at a standardized location of delivery–are conventionally used by commodity sellers as hedges against the risk that the market price of a commodity will move in an unfavorable direction before the commodity is ready to be sold. “The easiest example is a farmer who needs to make decisions about what crops to grow,” explains Foursby. “With a liquid futures market, the farmer can easily get a guaranteed price for crops before planting, and so can figure out how much and what to plant.”

The Wal-Mart trading pits–located near the store’s registers and designed to accommodate up to 45 live traders–permit customers to buy futures contracts on such familiar products as Pringle’s potato chips and Elmer’s Glue. “I’m long 200 July Cheese Whiz contracts,” explained a breathless trader shortly after the pit opened for its first trading day. “This is great. I already cleared a half-cent spread on 400 August 100 ct. paper clips.”

Though designed to help commodity producers control risk, most futures contracts in mature markets–typically more than 90%–go unexercised, with the buyer and seller of the contract simply settling in cash the difference between the contract price and the market price. “We expect that the Wal-Pits will work like traditional commodities markets,” notes Foursby. “That is, they will function as markets in risk–in the buying and selling of price fluctuation risk–rather than, primarily, as markets in the underlying products.”

“The value of the pits to Wal-Mart is potentially quite great,” explains Morgan retail analyst Jean Wobble. “As I understand it, all of the contracts are written with Wal-Mart stores as the standard delivery location. For those contracts that do go all the way to fulfillment, the natural thing for traders to do would be to buy the underlying products right there in the store, not to mention the pricing and inventory-management leverage that Wal-Mart will get by trading in the pits for itself.”

Customers who sign up for trading during the initial phase receive complimentary garish jackets and some quick lessons in pit etiquette, including shouting, gesticulating, huffing and puffing, and jumping up and down. “I’m ready to do some tradin’,” exclaimed a newly-minted trader in a green tie-dyed jacket. “Those Doritos contracts sound really good.”