James Marshall
A commuter reads the New York Post’ s rundown of the 1987 Stock Market Crash.
making calls to New York and Washington from an office in the presidential palace, where he had been scheduled to have breakfast.
In Chicago, the S & P 500 futures pit had opened on time, and the tension was fierce. The subdued crowd in the normally seething pit was smaller than usual. Melamed waited for the opening bell and saw the opening price. At first, he couldn’ t believe it. The spooz( the traders’ nickname for the popular contract) had dropped 7 % on the first trade, a staggering decline.
“ There were blank stares. No one could believe it was happening. Some people began to leave the pit,” a senior Merc trader later recalled.
Portfolio insurers sold more than three thousand spooz contracts in the first thirty minutes, and the futures price seemed to be falling more steeply than the S & P index itself.
This was an illusion. When Chicago opened at 8:30 am( 9:30 am in New York), many of the S & P 500 stocks had not yet actually started trading on the floor of the NYSE because there were no buyers. In that interval, the S & P 500 index was being calculated with stale prices from Friday, making the stocks seem far more expensive than the futures contracts— far more expensive, in fact, than they actually were.
Nevertheless, index arbitrageurs began their familiar dance, with a slight but devastating variation. As usual, they sold stocks heavily in New York, and in the first 90 minutes, the Dow dropped 208 points, more than 9 %, the loss predicted for the entire day. However, instead of immediately buying the S & P 500 futures, a number of index arbitrageurs held back, waiting for even lower prices in Chicago. And by not buying, of course, they helped guarantee that prices in Chicago would continue to fall.
By 11 am in New York, most of the stocks on the Big Board were open for trading, and there was a brief rally. After 40 minutes, though, it was snuffed out. With the S & P 500 futures still dropping in Chicago, the Dow now sank under wave after wave of sell orders from all kinds of professional investors— mutual fund managers, index arbitrageurs, and Wall Street’ s own proprietary trading desks.
By then SEC Chairman David Ruder had returned to his office from the Mayflower Hotel after giving a half-hour speech at a conference there sponsored by the American Stock Exchange.
Needless to say, it had been an uneasy audience; people were slipping out to the pay phones in the hall to check on the market. The SEC chairman had been surrounded by a scrum of journalists the minute he stepped from the podium. They pressed him to know if any steps had been taken to close the plunging market— perhaps because, two weeks earlier, Ruder had given a speech saying that a brief trading halt might be wise during a disorderly market collapse. With professorial caution, he told them that no discussions had been held but“ anything is possible … There is some point, and I don’ t know what that point is, that I would be interested in talking to the NYSE about a temporary, very temporary halt in trading.”
Trading halts in individual stocks were the cornerstone of Phelan’ s last-gasp plan to preserve the exchange. He had
24 FINANCIAL HISTORY | Winter 2018 | www. MoAF. org