Stocks Plunge 101 as Trade Gap Rises : Arbitrage Curbs Unable to Halt Fifth-Worst Slide
Broadsided by the shock of an unexpectedly large U.S. trade deficit, the stock market retreated at full steam Thursday, easily sweeping aside a New York Stock Exchange rule designed to clamp down on excessive computer-driven trading. The end result was the fifth-worst point loss ever for the Dow Jones Industrial Average, which dropped 101.46 points.
Traders said the market’s worst slide since a 140.58-point drop on Jan. 8 was exacerbated by so-called program trading, which relies on computerized timing to buy and sell stocks and stock-index futures in tandem.
211 Million Shares Traded
As it happens, this trading intensified after 2 p.m., when the Big Board shut its automated order-processing system to traders engaged in so-called “index arbitrage.” Large brokerage firms engaged in the practice simply shifted their multimillion-dollar orders to a waiting army of human floor brokers, who processed fistfuls of orders by hand. In all, trading volume reached 211.81 million shares on the New York Stock Exchange, compared to 185.2 million Wednesday.
But most market analysts blamed the drop on the trade deficit figures released by the Commerce Department in Washington shortly before the stock market’s opening bell. The figures showed that the merchandise trade deficit widened in February to $13.8 billion from $12.4 billion in January.
Most economists and stock investors had expected the deficit to drop to $11 billion or less, on the reasoning that the falling dollar has been stimulating foreigners to buy more American goods and discouraging Americans from buying foreign goods.
Thursday’s numbers suggest that the dollar may still be overvalued, which means, in turn, that the Federal Reserve Board will have to raise interest rates to protect the dollar from a deeper slump. All these possibilities are theoretically bad for stocks. Predictably, the trade figures instantly sent the dollar and bond market sharply lower.
“The trade figure was absolutely horrendous and a big surprise to everyone,” said Michael Metz, market strategist for the New York investment firm of Oppenheimer & Co.
The statistic depressed an already listless market, dispelling any remaining buying enthusiasm. “I don’t see any conviction from my clients whatsoever,” said Thomas Walsh, trading sales manager at the New York office of Nikko Securities International. “They’re clearly in no mood to jump in with both feet.”
Six-Day Rally Ends
Thursday’s collapse all but wiped out the 130-point gain registered by the Dow industrials in a six-session rally that ended Tuesday. “The market rallied for a week on the hope the dollar was firming and in the expectation of better trade figures today,” said Edward Shopkorn, director of equity sales at the New York investment firm of Mabon, Nugent & Co. “When you have a market without conviction, it doesn’t take a lot of adverse news to move it.”
The depression spread through all corners of the stock market. Almost all 30 stocks in the Dow industrial average lost more than $1; among the biggest losers were IBM, which fell $4.75 to close at $111.375; Exxon, down $2.50 to $43; and General Electric, down $2.25 to $40.625.
Among broader averages, the NYSE composite index fell 6.06 points to 147.14, the Standard & Poor’s index of 500 institutionally favored stocks fell 11.82 to 259.75, the American Stock Exchange composite fell 6.87 to 298.92 and the over-the-counter composite index dropped 8.89 to 374.52. On the Big Board, 11 stocks fell in price for every one that rose.
‘Collar’ Imposed
For only the second time since its creation in early February, the New York Stock Exchange’s “collar” went into effect, shutting the exchange’s automated order-transmission system--known as DOT for “direct order turnaround”--to large investors processing computerized stock/future buy and sell orders.
Under an informal regulation still awaiting approval from the Securities and Exchange Commission, those “program traders” are barred from processing orders through DOT for the balance of a trading day once the Dow industrials move 50 points in either direction. From that point on, program traders engaged in arbitrage must transmit their orders manually.
The threshold was hit at 1:54 p.m., exchange officials said. According to traders and other market professionals, index-related arbitrage actually appeared to intensify appreciably in the following half-hour and remained heavy for the balance of the trading session.
Arbitrage Opportunity
Some futures professionals argued that the collar actually created an arbitrage opportunity: By hampering stock orders from large institutional investors trading simultaneously in stocks and futures--but leaving unaffected their ability to trade futures--the collar contributed to a sudden, sharp widening of the price discrepancy between the futures and the related stocks. That discrepancy is exactly what generates this variety of program trading.
Still, floor brokers said the collar may have rendered the afternoon’s activity more manageable. “It’s never business as usual when the market loses 100 points, but this was certainly less hectic and more orderly than any other 100-point days we’ve had,” said Robert Jacobson Jr., a prominent floor “specialist” responsible for supervising the trading in certain stocks.
