La Plus Ca Change, Trading Edition

On Friday’s anniversary of the ‘87 Crash, the WSJ put some of the articles from the days after on its website.  This one in particular makes fascinating reading, and is quite enlightening for those who pine for the good old days, when markets were slow and the livin’  (and tradin’) was easy.

For even back in those lost and lamented days when trading took place face-to-face on the floors, during times of market stress things seemed to move fast.  Very, very fast:

And the stock-index markets were leading the way down — fast. In a nightmarish fulfillment of some traders’ and academicians’ worst fears, the five-year-old index futures for the first time plunged into a panicky, unlimited free fall, fostering a sense of crisis throughout U.S. capital markets.

. . . .

Within seconds of the open, S&P 500-stock index futures prices sank 18 points — surpassing the nerve-racking record declines scored in an entire day on Friday. Salomon Brothers Inc. began unloading contracts at an unheard-of rate of 1,000 at a time, dumping more than $600 million in stock-index futures in the first hour of trading alone, one pit trader estimated. Salomon officials couldn’t be reached for comment on the estimate.

[Emphasis added.]

Note too that the big orders are not a modern phenomenon that arose only when HFT algos came on the scene.

And liquidity suppliers fleeing the market is not the monopoly of modern computerized trading where HFT is prevalent:

Then, as buyers fled the market in alarm, trading nearly dried up, temporarily preventing the markets from functioning as a hedging mechanism — their principal reason for existence.

. . . .

Yesterday, as institutions and investors scrambled to lay off at least some of their risk in futures, trading in the index markets virtually dried up at several points, threatening a liquidity crisis on the Merc’s trading floor. At mid-morning, the S&P prices were moving up two points, then back down, in less than a minute, as sellers scrambled to fill orders at any price they could get.

One difference between human and computerized market makers.  Computers don’t cry:

Up the street at the Chicago Board Options Exchange, a market maker wept softly in the men’s room.

One other thing from the article caught my eye:

With trading delayed in many major New York Stock Exchange issues because of order imbalances, Chicago’s controversial “shadow markets” — the highly leveraged, liquid futures on the Standard & Poor’s 500 stock index — were, for just a few minutes, the leading indicator for the Western world’s equity markets.

Shadow markets. Really?  The only market that was open for a while, the only one that was discovering prices-that’s the shadow market?  An interesting comment on the WSJ’s-and Wall Street’s-attitude towards futures markets at the time. Note that now, futures markets are considered worth emulation, and the demonization has been focused on the new “shadow market”: OTC derivatives trading.

As I’ve written numerous times: things aren’t all that different now.  The economics of markets and market making are pretty much the same in computerized and open outcry environments.  When it hits the fan, things move very rapidly in both.  There is no Golden Age of leisurely markets.

About Craig Pirrong 228 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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