Dow Index Climbs 33.95 to Finish Above 2,300 as Wild Swings Mark Final Minutes
With investors preoccupied more with the impact of computerized trading programs than with any economic indications, the stock market rose to a record level Friday, the latest of the so-called “triple-witching days” that have produced wild price swings in the final minutes of trading.
The Dow Jones industrial average gained 33.95 points to close at a record 2,333.52, the first close above 2,300 for the widely watched index of 30 blue-chip stocks. It was its fourth consecutive record close.
But, as is characteristic of the quarterly “witching days,” the Dow’s closing figures scarcely described the bizarre action of the market’s last half-hour. Between 3:30 and 3:50 p.m. EST, the index lost nearly nine points--then surged nearly 17 in the final 10 minutes of trading.
In the last minute alone, almost 53 million shares worth about $2.3 billion changed hands on the New York Stock Exchange. Friday’s total NYSE volume of 234.01 million shares was the eighth-largest in history.
Behind these gyrations were the quarterly expirations of the three investment instruments that have all but dictated institutional trading on certain key days during the last two years. These are stock-index futures, options on those futures and stock options.
The prices of these futures and options contracts are roughly tied to the prices of corresponding stocks or groups of stocks. On the third Friday of every third month--March, June, September and December--a set of each of these contracts expires, provoking traders into binges of tandem buying-and-selling of the corresponding stocks in attempts to profit from vestigial price differences between them.
Can Go Either Way
The course of the last-minute stock trading is almost impossible to detect in advance--hence the term “triple-witching day.”
“The real unvarnished truth,” said Eric Seff, managing director of Chase Investors Management Corp., early Friday “is that I have no idea today what’s going to happen this afternoon.”
Some triple-witching days have set world records for wildness. On the last one, Dec. 19, about 80 million shares changed hands in the last trading minute; that session was marked by a last-minute set of buy orders worth more than $1 billion from the firm of Salomon Bros., which was subsequently accused by other traders of violating new rules on late market orders. Salomon dismissed the accusations.
May Have Backfired
Friday’s session featured some New York Stock Exchange rules aimed at curbing the market’s volatility on triple-witching days. As it happened, some traders say, the rules may have provoked some volatility instead.
As was the case on Dec. 19, the exchange, with the approval of the Securities and Exchange Commission, required floor traders to report at 3:30 p.m. any heavy imbalance of “market-on-close” orders in each of 50 key stocks. “Market-on-close” orders are those submitted in advance to be executed at the closing price of the day; they are favored by traders involved in the stock-and-futures parlays.
Under the NYSE rules, no one can enter a market-on-close order after 3:30 unless it is on the opposite side of the imbalance. In other words, if there are heavy “buy” orders for one company, only a sell order can be accepted on a market-close basis. This time, there were other rules dictating the behavior of traders involved strictly in the stock-and-futures game.
Traders said rumors had put the probable volume of market-on-close buy imbalances as high as $2 billion, an expectation that had provoked heavy blue-chip buying most of the day.
When the order imbalances were disclosed shortly after 3:30, they were indeed buy-oriented--but only by about $500 million. The disappointed expectations produced the heavy selling shortly after 3:30, and that in turn brought buyers back into the market for the final surge.
“Clearly, the 3:30 disclosure caused volatility,” said Courtney D. Smith, vice president and director of futures at the New York investment firm of Twenty-First Securities. “Because of the rumors, people were buying blue chips to profit from the close and, when the numbers came out, the market sold off.”
Not everyone agrees. “Who knows what the alternative would have been?” said Michael Metz, senior vice president and portfolio strategist at the Oppenheimer & Co. brokerage. “But it is nice to have it out of the way for another three months.”
On the next expiration day, yet another set of rules will come into play: The expiration times of the stock-index futures and their options will shift to the opening of the Friday session, rather than the close. The idea is to give the stock exchange’s floor traders more time to absorb the heavy order flow in the hope that this will cut down price swings.
