REBOUND ON WALL STREET : Commodities Market : Record Trading Day Failed to Ruffle Chicago Exchange
Long before the market opened Monday, traders were vying for space using elbows, shoulders and hips in the tightly packed, often volatile pit where Standard & Poor’s 500 futures contracts are bought and sold at the Chicago Mercantile Exchange.
It was here, some critics claim, that the fuel that powered the market crash of 1987 was ignited. It is a contention hotly disputed by Mercantile Exchange officials, debated by others and remembered by all.
But Monday, Oct. 16, 1989, proved to be far different from Monday, Oct. 19, 1987. Each was a record trading day at the time, but otherwise history did not repeat itself.
Credits NYSE
Two years ago, a single S&P; contract, based on the stock value of 500 companies listed on the New York Stock Exchange, plummeted almost $40,000 in a single day of panic-driven trading when 150,000 contracts changed hands. This Monday, that same contract increased $10,325 and 80,386 were traded, half the 1987 volume but double the normal daily volume.
Analysts and market insiders attribute the differences to a variety of factors ranging from lessons learned after 1987 to quick, public action by the Fed this time.
“The main factor was that we survived (Oct. 19, 1987),” said Merton H. Miller, a University of Chicago commodities authority who studied the 1987 crash for the Mercantile Exchange. “There were people who literally thought the world was coming to an end. People were doing dumb things simply because of the fear of the unknown. Now that we know that there’s nothing under the bed, it isn’t quite as frightening as it was.”
“Two years ago it was such a shock,” said David B. Mirza, an economist at Chicago’s Loyola University. “Today we were ready for it. Because we had the experience of Black Monday, we said, ‘Let’s do what we can to try to reduce the possibility of something like this happening.’ ”
Miller also credits the New York Stock Exchange for averting a repeat of the 1987 plunge. Two years ago the stock exchange was unable to keep up with buy and sell orders, and the ticker was more than two hours late. As a result, traders in Chicago were unable to learn the prices of the New York-listed stocks that are the underpinnings of the S&P; contract. Monday there was only one four-minute delay in the ticker early in the day, and, despite the second-highest volume ever, the exchange was able to handle the flow of orders.
Two years ago, “it was like a big black hole. You couldn’t get indications of what current prices really were,” Miller said. “That contributed to a sense of, ‘Jeez, we better sell while there’s still a chance to salvage something.’ ”
A third element this year was the quick response by the central bank to guarantee a sufficient flow of capital into the banking system.
“The resolve of the Federal Reserve system to supply as much liquidity as needed to the banking system and ultimately to the financial institutions involved in stocks and futures markets and the public announcement of this fact . . . was reassuring,” said Mirza. The Fed took similar action in 1987 but it was not announced publicly until after the crash.
“(Federal Reserve Chairman) Alan Greenspan will go down as one of the greatest central bankers of all time,” said Northwestern University finance professor Eugene Lerner, who once had Greenspan as a student when both were at New York University. “He’s acting exactly the way a central banker should.”
Mechanisms put into place by Chicago and New York financial markets were also cited both by academics and market insiders Monday. Those ranged from “circuit breaker” trading halts when stocks or futures prices fall a certain amount, to raising margin limits for traders, to hot lines linking the heads of the Chicago and New York financial markets.
“Everything performed 100% according to our expectations,” said John T. Geldermann, Mercantile Exchange chairman. But the veteran of the Chicago Board of Trade and the Mercantile Exchange was cautions. “It’s very hard to breathe easy anytime,” he said.
