Here’s What a REAL Financial Panic Looks Like
Fear can be headier than whiskey, once man has acquired a taste for it.
Donald Dowes
“Global Markets in Freefall”
“The Dow Plummets 1,000 points Before Recovering”
“Trading Tumult Exposes Flaws in Modern Markets”
A dozen or so framed pictures grace the walls of my home office. Most are photos featuring a pleasant family life full of Christmas portraits, Saturday morning soccer games and cross country races. But there is one curious picture hanging directly behind my desk, buried in dark shadows between a bright green souvenir flag from my trip to the 2001 Masters (back when I used to be somebody) and a crimson red “Whose Got It Better than Us?” towel waved frantically during a Jim Harbaugh-fueled 49er playoff game. It’s a remarkably stark picture of a black computer screen (taken from a Quotron machine, for those of you on Wall Street who were born before they invented Bloomberg), filled with a potpourri of obscure white letters and numbers than mean absolutely nothing to 99.99% of the population. But to those of us who were there, it’s a snapshot of pure, uninhibited, and unadulterated financial fear.
October 19, 1987. Black Monday. That freakishly scary day makes the market turmoil from this past week look like a festival of unicorns and rainbows. Here’s what I see when I look at that picture.
INDU – 508.32. That’s the first thing you notice. Translated, it means the Dow Jones Industrial Average closed that day down 508 points from the previous night’s close. Except the popular stock market index didn’t have a 16 handle like it did most this week. That fateful day the Dow Jones opened with a 2 handle, and closed with a one handle. That’s why God invented Pepto-Bismol. Or tequila.
CMB 28 -8 ¾, CHL 25 ¾ – 10, BT 30 ¾ -11 ½, MHC 29 – 9 ½. These are the stock symbols for Chase Manhattan Bank, Chemical Bank, Bankers Trust and Manufacturers Hanover Bank. They don’t exist anymore. Neither do stocks prices quoted in fractions.
BSC 13 7/8, -4 1/8. I miss Bear Stearns. I also miss trading in eighths.
DEC 130 – 42 ¼. Digital Equipment Company, the “must own” stock of the mid-80’s. This white-hot company burned out faster than Duran Duran.
DVOL 603,137. That means over 603 million shares on the New York Stock Exchange traded down in price that day. Total volume was 605 million shares. Another reason why no one calls that day Happy Monday.
GM 50 -16, F 69 -15, C 27 ¼ -5 ¾. General Motors, Ford, and Chrysler. No one was ever going to buy a car again.
PG 61 -23 ¼. Procter & Gamble. No one was ever going to buy toilet paper again.
What you don’t see on the screen are stocks with four letters in their symbols, which means the trader who took this picture only traded stocks listed on an exchange, not over-the-counter (OTC) stocks like Apple or Microsoft. Back then, OTC stocks traded not at a “place” like the New York Stock Exchange, but rather on a network of trading relationships organized by brokers and dealers who acted as market makers. An OTC trader at First Boston got on the phone to bid or offer stocks at Goldman Sachs, or some other broker/dealer. In short, OTC markets in the 1980’s were less transparent and operated with fewer rules than the NYSE. That’s why, on October 19, there wasn’t very much trading in OTC stocks. Brokers sat at their desks and simply refused to answer their phones. If you don’t believe me, ask Robo. He was on (or under) the OTC desk at Kidder Peabody that day.
I took the picture off my wall and brought it into work this week. I wanted to show my trading colleagues at Penserra what a real financial panic looked like. Historians analyzing the Stock Market Crash of 1987 point to the flaws inherent to “program trading” tied to “portfolio insurance” as the culprit of the market meltdown. As for this most recent selloff, I heard a talking head on CNBC explain this most recent “correction” by listing a shopping list full of excuses, including “trading algorithms that kicked in after Kazakhstan devalued its currency.” His comment brought a smile to my face. Back in 1987, algorithmic trading hadn’t been invented yet.
Neither had Kazakhstan.