Blast from the past: How Futures saved Stocks

Anybody that knows us well enough (or has consistently read this blog), knows that we can’t resist a movie/documentary about trading or markets. Recently, Futures Magazine has been on their game, sort of re-releasing market documentaries on their website about the trading floors in Chicago. We’re not going to hide that we weren’t too impressed with their last film, “Floored,” which we thought made floor traders appear as drug addicted boobs (which more than a few are…but which the grand majority are not).

Fortunately, that wasn’t the case for the latest re-release – last year’s documentary, “Cancel Crash,” which celebrated the 25th anniversary of the 1987 market crash by the floor traders of Chicago as the saviors of the stock market’s Black Monday crash.

Cancel Crash

From the start, “Cancel Crash” shows a collage of news reporters in the cheesiest of 80’s fashion, describing the stock market crash occurring on Black Monday, 1987. As many of us might recall, the Dow plunged 505 points in a single day, a 22% drop. As Futures Magazine put it, “$500 Billion worth of stocks vaporized.”

But the story within the story was what was going on the next day, October 20th. Many of us now look at that day as the single best buying opportunity maybe ever. But it wasn’t that easy. The real story is there were no buyers the next day, to the point where the specialists on the NYSE who were supposed to be the buyers of last resort would not step up and offer to buy any stock. With no public buyers, and the specialists unwilling to step up – there was essentially no market, with bid/offer spreads insanely wide. With no last price at the NYSE, the market makers in the CBOE (the options exchange for NYSE stocks) weren’t quoting any prices on the options on those stocks. And finally, in the S&P 500 pit in Chicago – the clearing firms were pulling traders who cleared their firms out of the pits because they had too much exposure already. As one trader puts it:

 “I was in the S&P pit. What I remember most was that the clearing firms came down and took most guys out of the pit and didn’t let them trade because it was too dangerous. Only a few of us were left and we just tried to stay short because we knew what was going down.”

So next thing you know, the market is looking at the NYSE, the CBOE, and the CME closing because there are no buyers; sending further panic through all market participants. But the CBOT stayed resistant, remaining open, trading MMI Futures (Major Market Index) which was a market linked to a portion of companies/stocks in the Dow (essentially an earlier version of Dow futures, since there was no Dow futures at the time).

MMI Dow Futures

And it was in the MMI pit, so the movie says, where one trader – Chicago market maker Blair Hull – did what no other trader would do….BUY the plummeting market with 150 contracts between prices of 285 and 292. Being a thinner market with much less volume than the S&P futures across town, these 150 contracts sent the MMI futures screaming higher, moving 25% higher in hours.

Buy Paper

The move in Chicago was enough to catch more than a few eyes, for it represented a huge arbitrage opportunity where someone could buy the actual stocks represented by the MMI index from the NYSE, and sell the MMI futures in a like amount to lock in an instant gain. And the rest is history, as those seeing the arbitrage opportunity came roaring back into the market buying up what the specialists would not and stabilizing the market from what had seemed like a bottomless fall hours earlier.

This Documentary takes those with years of experience on the floor and puts you into the action, describing the atmosphere on Black Monday as, “Civil War like,” with people crying, and fear overtaking grief for the first time they can remember. For those unfamiliar how futures, the pit, or how orders used to be fulfilled before the days of computer trading, “Cancel Crash” is a blast from the past educational experience with a gripping story line.

We don’t want to spoil you with too many details. With the documentary only 45 minutes long, there’s no reason not to pop some popcorn, head on over, and learn a thing or two.

Write a Comment

The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.