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The 1980s' superstar commodities trader, is now doing what his computer tells him

For years, Richard J. Dennis lived by his wits in the commodity markets--and quite a living it was. His knackf or the quick kill made him an est imated $200 million in the 1980s and bro ught him fame unmatched by any

other futures t rader. Then his instincts f ailed him. By the early 1990s, having lost tens of millions f or his

customers, he quit the business . Now, he's trading again, with a dif f erence.

Instead o f acting directly on his thoughts, theories, and impulses, Dennis translates them into computer

programs. When those bits and bytes align with market prices, the computer orders a trade. Under an

agreement with a third-party broker who cont rols most of his customer funds, Dennis must f ollow the

system. No matter what his gut tells him, discretion isn't allowed. So f ar, the deal has paid of f : With a 111%

gain in 1996, Dennis once again ranked among the world's to p-perf orming commodity t raders. ''The left sid

of my brain has put the right side out of business,'' the soft-spoken 48-year-old explains.

HUGE LOSSES. Dennis' transf ormation to robo- trader could prove signif icant. In derivatives markets, tamin

traders is the preeminent risk-management pro blem--just ask Barings PLC or Sumitomo Bank Ltd. A comput

system that limits potential losses has great appeal. In Dennis' case, his goal was to separate a brain loade

with money-making insights f rom the heart o f a gunslinger. By the t ime he retired in 1988, he had shot

himself in the foo t by making unusually risky trades- -purchasing huge quantities of opt ions just bef ore the

expired and became worthless, for example. In one day, he los t $8 million in a so ybean trade gone bad.

Losses in his personal accounts paralleled those o f his f unds. Adding insult t o injury, an early 1990s

comeback attempt f lamed out in months.

Now, the system curbs Dennis' tendency to go o f f on f liers by imposing strict risk parameters. In

programming the computer t o evaluate price, volume, and other market data in search of prof itable trades,Dennis says he employs only st rategies that have survived rigorous test ing and proved successf ul in the

past. While many traders employ computer models, such rigid systems remain more the exception than the

rule; most traders keep some discretion.

Despite his past big losses , customers have responded enthusiast ically to Dennis' new approach. So f ar,

they've given his Dennis Trading Group Inc. $85 million to manage, up f rom $2 million at t he beginning of

1996. ''What I see here is completely dif f erent f rom the way he was bef ore,'' says Bob Collins o f Rosentha

Collins Group, an investor in the f und whose f irm has cleared trades f or Dennis since the 1970s. ''It's very

disciplined and regimented.''

If the pas t is any guide, Dennis is reaching the point where his computers will be truly tested. A review of his

trading over the past decade shows that , like many traders, he has perf ormed best when handling relativelysmall amounts of money. In 1987 and 1988, when he was trading as much as $159 million, his net loss af ter

f ees was $60 million. And in 1992, when his equity climbed as high as $86 million, he los t $48 million. So f ar,

the f ast growth of his stake hasn't caused him to spin out o f contro l, though it may have slowed him down

Through February, he was up 6% f or the year, compared with nearly 10% a year earlier.

By thwarting the impulses that led to huge losses in the past, t he computers have f reed him to concentrate

on t he theorizing that was always his greatest love, Dennis says. His f aith in his new system has led him to

promote himself aggressively, even though he swore in the late 1980s that he'd never trade again, except a

a pastime. He changed his mind, he says, because he wants to build a war chest to support a variety of

philanthropic and polit ical goals--among them, legalizing marijuana and aiding victims o f domest ic abuse.

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Money, he says, ''is the main ingredient if you want to inf luence things.''

Like many kids gro wing up in blue-collar Chicago, Dennis viewed the city's f utures exchanges as his bes t

shot at riches. He became f ascinated with t rading even befo re he was o ld enough to enter the pits. While

st ill a teenager, he persuaded his dad, a city engineer, to f ill orders f or him. Before long, the plump, bookish

kid had lost half his f ather's lif e savings and his younger brother's pizza-delivery money, too. ''I made every

mistake 10 times over before I was 21,'' he says. Yet even as he learned through painful trial and error to

anticipate price movements, he never lost the courage to bet the ranch. He made his f irst million by age 25,

and his f ortune soared over the next decade. Never married, he remains close to his brother, Tom, a vetera

trader and his longtime partner. He guards his privacy carefully and declined to be pho tographed for t his

article.

By 1984, Dennis was one of the biggest single traders in the commodity markets, and mere rumors that he

might be buying or selling would move prices. When he placed class if ied ads proclaiming ''trader wanted,'' he

got some 1,000 responses f rom people eager to learn his secrets. He settled on f ewer than two dozen

novices- -among them two pro f essional gamblers and a fantasy-game designer-- and after a two-week

training program, he gave them money to t rade under his f irm's auspices. Several went on to become top

commodity-f und managers, including Jerry Parker of Chesapeake Capital Corp., who now manages more

than $1 billion. ''It was sink or swim. Sort of an experiment,'' recalls Parker, a f ormer accountant . Dennis ran

the training, Parker says, ''because he wanted to have a certain chunk of money traded using systematic

rules'' while he went on and tried out new techniques.

As Dennis' bank account grew, his interest in inf luencing public af f airs grew along with it. Start ing with a

$1,000 donation to George McGovern in 1972, he has given $10 million to politicians, he reckons. An

additional $20 million went t o a think tank he fo unded in the early 1980s and closed in 1989, and still more

went t o a private f oundation, he says. While some of the money paid fo r domestic-violence shelters, his

chief cause is decriminalizing pot , which he calls good economic and social policy. ''A lot of people give

money to the heart association,'' he says dryly. ''I try to pick things that are as unpopular as possible.''

In addition to giving money, Dennis has participated in political debates and written op-ed pieces and

magazine articles, including a 5,000-word art icle on the economics of legalizing drugs that ran in The Atlant

in 1990. When his public f unds collapsed in the late 1980s, burned investors accused Dennis of being sodistracted by politics that he f ailed to monito r trading--an accusation he disputes. In any case, Dennis says

all his po litical giving achieved litt le. ''I wasn't looking f or an ethanol subsidy. I was looking fo r specif ic policy

outcomes,'' he says. ''[The po liticians] would say, 'What's t he hidden agenda?''' The lack of results helped

trans f orm him f rom liberal to libertarian. These days, he advocates less government at all levels: ''The rule

of thumb in politics ought to be, when in doubt, don't do it.''

BIG LOAN? Dennis is deeply bitter about a class action brought against him by investo rs af ter his big losse

In 1990, plaintiff s concluded that he was ''f inancially strapped'' and ''debt-ridden,'' and court records say he

agreed to bo rrow $2.5 million f rom his brother f or a sett lement. Dennis says his net worth has been in the

millions f or more than 20 years and that he paid the set tlement. But Philadelphia attorney Merrill G. Davidof

who represented plaintiff s, insists: ''He had no money.''

That's not an issue any longer. The question now is whether he can maintain his phenomenal rates of

return. Will he subst itute nerve endings f or microchips if his results head down? Dennis says no. Yet his

f unds' disclosure documents impose no legal obligation to obey the computer. The f ine print must read tha

way, his partners say, so t hat Dennis can exit markets quickly in the event of war or f inancial meltdown. If h

overruled the computer under less drastic circumstances, ''We would close our accounts ,'' says Esther

Goo dman of Kenmar Holdings Inc., the f irm that reconciles Dennis' computer signals with his trading blot ter

on behalf of customers. Still, f or investors it's a matter of trust t hat Dennis, once so quick to shoot f rom

the hip, will keep his guns holstered in bad times as well as good.

By Greg Burns in Chicago

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TABLE: Portrait of a Robo-Trader

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