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Wall St. Looks Back : Speculators’ Wild Ride Led to Crash

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Times Staff Writer

Late in the afternoon of Oct. 19, with the stock market cataclysm raging about him, Stanley Druckenmiller began to have trouble remembering telephone numbers.

It was a fitting end to the long day. For more than six hours the portfolio manager for Dreyfus Corp. had watched the torrential selling throughout the financial markets stretch out of recognizable shape the numerals and mathematics he had spent his professional life comprehending.

Things moved faster and farther than anyone on Wall Street had ever seen. Just as you absorbed the shock of seeing the Dow Jones industrial average down 300 points, it was already down 400, then 508.

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“I must be more shook than I thought,” he said to himself, struggling to recall the numbers of brokers and stock analysts he customarily called three or four times a day.

Still Shaking

Even today, two months after the greatest crash in Wall Street history, the financial markets are still shaking. The stock market has yet to regain composure after the one-day loss of 508 points, or 22.6%, in the Dow Jones average.

Market shifts are sometimes subtle, but to traders, investors and executives, Oct. 19 marked a transition to a bear market as dramatic as anyone could imagine. Stocks have continued to slump and Wall Street has embarked on a round of painful layoffs, thousands of workers at a time.

It is tempting to regard the debacle of Oct. 19 as a one-day event. That would be misleading. For the crash, which struck not only the stock market but related futures and options markets, could not have happened without the wave of euphoric speculative buying preceding it all year, capping a historic bull market that began in August, 1982.

Many Tiny Panics

What appeared to be a solitary headlong panic Oct. 19 was a composite of millions of tiny panics--split-second decisions made by millions of traders and investors provoked to dump their shares at any price by the sight of something fearsome building in the markets or unfolding that day.

For some it was the realization early on the morning of Black Monday that a great speculative bubble had been punctured. Some feared the spread of panic would destroy their own wealth unless they reached the exits first. Still others, horrified by mechanical breakdowns appearing in exchanges flooded by orders, feared the very system would not survive the day.

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On normal days even heavy selling eventually attracts buyers who believe prices have fallen to bargain levels. That is an equilibrium-producing condition so reliable it is the closest thing to a rule of the market.

But as one prominent trader put it some weeks later: “There were no rules that day.”

In the crash’s aftermath, presidential commissions, congressional committees and industry groups have begun to examine the market’s mechanisms in a search for villains. Some blame futures markets, where stock traders spent billions trying to lay off the risk of making investments, only to discover that in a crash there is no safe harbor.

Others blame the “specialists” on the New York Stock Exchange, a group of brokers who supervise the trading in each of the 1,500 NYSE stocks. Burdened with the duty of acting as the buyers of last resort, the specialists, the accusers say, failed to buy aggressively enough shares to keep prices from plunging.

But as interviews with dozens of traders, investors and financial managers show, the root of the crash is not the market’s machinery. On the Big Board, 604.3 million shares traded, nearly twice the previous one-day record and three times the average of even a heavy day. And when investors dump more than 600 million shares in a day, nothing known to man can prop prices up.

The root of the crash is in the explosive speculation of the previous year.

THE PRELUDE

Twice over the weekend of Oct. 17 Bill King heard his boss’s voice over the telephone in his Morristown, N.J., home. Jack Conlon, the head of equity sales at the New York office of Nikko Securities, was concerned at the nervousness gnawing away at his head stock trader after the frightfully unsettled market of Oct. 16, when the Dow dropped 108 points and a record 338.5 million shares traded.

Enjoy the weekend, Conlon counseled, make sure you take it easy. We’ll attack the market on Monday morning.

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In truth, on his way home to New Jersey Friday night King had already begun to lose conviction that Friday had ended the market’s giddy slide. Friday had the hallmark of a historic breakpoint: The Dow industrials had dropped as much as 138 points before a weak 30-point rally in the closing minutes. King was preoccupied with the chance he was facing “the once-in-a-lifetime occurence that every trader fears . . . that something’s going on that could bury you.”

A native of Chicago, King, 35, is burly and blunt; in demeanor he resembles that other Chicagoan John Belushi. Like many other stock traders, King’s trading responsibilities at the Tokyo-based firm he worked for had run against the grain of what he believed was happening to the stock market.

He thought the market was cracking.

Obvious Strain

There had been obvious strain for months. One day in early October, as the Commerce Department released yet another round of disappointing foreign trade statistics, stocks dropped 91 points.

Then on Wednesday, Oct. 14, a news item from Washington knocked another leg out from the bull market. The House Ways and Means Committee was considering a bill to restrict takeovers. Suddenly, scores of takeover stocks fell out of bed.

These were known as “arb” stocks because they were heavily traded by risk-arbitragers, who borrowed so much to speculate on the outcome of completed takeover deals that even a slight jar provoked the wholesale dumping of heavily mortgaged shares on the market. The drop demonstrated anew how much the stock market rise was dependent on volatile takeover values.

That day the Dow fell more than 95 points. On Thursday skittish portfolio managers knocked the market down another 57.61 points, all of it concentrated frighteningly in the final hour of trading. Then came Friday’s 108.3-point debacle.

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Extreme movements on bad news portended a peaking market. Obviously the buyers who had been euphorically trading stocks higher and higher were easily alarmed, even if they resumed their bullish buying the next day.

Many traders believed that the market had become unhooked from reality in January, 1987. For the last half of 1986, a kind of fearful bearishness had been the rule. Money managers responsible for the portfolios of insurance companies, pension funds and so on had spent much of the year selling on strength. Every time the market rallied, heavy selling flattened it.

So the market came on strong at the beginning of 1986 but finished in the doldrums. The Dow gained 22% by March, but ended December almost exactly where it began July.

New Year’s 1987 witnessed a sea-change in the big investors’ strategy. Having sold stocks in December to take advantage of tax-law changes and flush with cash, they began to buy during slumps--”buying the dips.”

Now, every time the market slumped, it reversed course and hit new highs. The Dow picked up 113 points in the first two weeks of January alone.

The euphoria fed on itself. If every short-lived slump presaged a new record, why not keep buying? Market gurus fed the frenzy by predicting the Dow, which in January had passed 2000 points for the first time ever, would hit 3600 before long.

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His Trademark

Among those buying the dips was Stanley Druckenmiller. “It was my trademark,” he says. Druckenmiller had been assigned by Dreyfus Chairman Howard Stein to take over the mutual-fund firm’s two newest funds. These had the authority, unlike most others, to trade futures and options as well as selling stock short, which means selling borrowed shares in the expectation of buying them back at a lower price. Futures, options and short sales are all hedges against market downturns.

Of course, the more one ignored fundamental values and bought stocks simply because they were going up, the more one sought refuge in hedges like futures and options. If you believed you were buying nothing of intrinsic value, you were inclined to hedge a lot of risk. Throughout 1987 the speculative bubble and the futures and options markets grew together.

“The more sophisticated people never justified stock-buying in 1987 on the basis of (corporate) valuations,” Druckenmiller recalled after the crash. “We’d been talking all year about fairyland valuations.”

Everyone could cite reasons why the market was too high. Interest rates, for one, were up. And anyone who paid attention to market statistics could see that the Dow index was heading into the red-line. By the time it reached its peak of 2,722.42 on Aug. 25, the Dow had roared ahead 250.1% from the start of the bull market in August, 1982. Only once in history had the market gone so far to a record high, and that surge had ended with the crash of 1929.

The market’s price-earnings ratio, the widely followed measure of stock price as a multiple of a company’s profits, had reached an average 21.5, meaning it was edging close to the record 24.1 reached in September, 1961, just before a six-month bear market, the worst since the Great Depression, pared 27% from stock prices. There were warning signs by the handful.

Yet the alarms sounded unconvincing as long as the market went up. Your competitors bought, you bought.

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“Everyone knew this had to be a speculative bubble,” Druckenmiller says. Like most of his colleagues, he anticipated a market crash. “But I expected it in 1988 or ’89.”

To Michael N. Girardi, all the delusions fueling the stock market were represented in the activities of those he called “bull-market traders.”

As the chief options trader in New York for Jefferies & Co., the Los Angeles stock brokerage, saw it, trading desks all over town were staffed by youthful business-school graduates who came into the market after 1982, persuaded of their genius by the money they made in what happened to be the greatest bull market of all time. They weren’t particularly adept at visualizing the frigid blast of a genuine bear market.

He knew differently. Girardi had joined E. F. Hutton during the bear market of 1974 as a margin clerk, notifying customers who had borrowed to buy their stocks that their shares’ values had fallen below the amount they owed. Hutton often exercised its right to sell off those clients’ stocks. At that point the clients still had to repay any uncovered borrowings.

Painful Calls

“I still remember the pain of calling account executives and saying, ‘I’m sorry, I’ve got to liquidate your account.’ So it was easy for me to see events unraveling.”

Now he watched colleagues engage in such patently speculative maneuvers as “writing,” or selling, deep out-of-the-money put options, a practice that is highly profitable if stocks remain stable or rise in value, but dangerously unprofitable if they fall.

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The buyer of the option gets the right to sell a portfolio of stocks at a set price within a set period; the seller, or writer, faces the potential obligation to buy that portfolio. In a rapidly declining market, the writer could be forced to buy huge quantities of stock at prices well above its resale value.

As remote a possibility that a market drop seemed in the summertime, if things turned bad a lot of option buyers were going to flee the stock market by forcing the writers to buy their stock portfolios at pre-crash prices. To the option buyer, it was like making someone buy your house for $150,000 when it was only worth $100,000. An option writer who pocketed a $2 premium might have to cover his obligation for $150.

This kind of latent risk bred a delusion among the writers. Girardi heard them articulate it after the market collapse on Friday, Oct. 16, and through the following weekend. They were arguing that the drop was only a modest one, exacerbated by Friday’s monthly expiration of October stock and index options, which indeed had the effect of exaggerating market moves.

“In the worst case they figured on a down opening Monday,” he recalled. “A lot of people I talked to thought it was the classic buying opportunity.”

THE OPENING

Stanley Druckenmiller had stayed up all night Sunday, absorbing the tide of panic he heard rising in his friends’ voices.

For the 6-foot-plus Virginian the week had begun Saturday morning with an unpleasant epiphany. Druckenmiller had been in his office in the General Motors Building, across 5th Avenue from the Plaza Hotel, studying charts of trading patterns for the 1,500 stocks on the New York Stock Exchange.

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With a start he realized that hundreds of stocks displayed a distinctive pattern: a sequence of three parabolic rises and dips in price, the second higher than those at either end. Known as a “head-and-shoulders,” it was the most famous bear-market price pattern of all.

Druckenmiller realized he had made a dreadful mistake in his trading Friday. In the aftermath of the market’s sharp break that day, he had bought stock index futures and sold put options, hoping to profit from a subsequent bounce. If a real bear market was in force, that defensive step would backfire.

For the rest of the day Druckenmiller’s staff heard his gentle baritone instructing them to get the Dreyfus Strategic Fund out of the market Monday.

The next day, Sunday, he spent talking to the traders, managers, and brokers he counted as part of his “network.” There was a disquieting note of panic on the lines. Early in the day, people were spooked at Treasury Secretary James A. Baker III’s appearance on “Meet the Press,” where he indicated he would let the dollar slide further against foreign currencies. At 7 p.m. New York time, when the Tokyo Stock Exchange opened with plunging prices, there was more panic.

So Druckenmiller stayed up all night to study the trading patterns of stock market panics like 1929’s. Come Monday, he figured, there would be another panic in New York. His network would be selling heavily.

Yet many brokers and traders arrived for work Monday convinced that Friday’s drop was the blowoff they had been anticipating for months. Many had plans to begin buying shares, if gingerly, at some point in the morning. But when the first tentative market indications flickered onto their video screens and the first calls came over the telephone just before the market openings at 9:30 a.m. New York time, the plans gave way to fear.

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In his fourth-floor office at Bankers Trust Co. on Park Avenue, Rick Nelson, one of the bank’s investment managers, was absorbing reports that the futures pits in Chicago were inundated with sell orders, thousands of them from firms executing so-called “portfolio insurance” for large investment funds.

Portfolio insurance was a novel device designed to protect investment managers from the risk of catastrophic drops in the value of their holdings. In one popular form marketed by several firms, the heavy selling of stock-index futures as stock prices dropped supposedly guaranteed clients against stock losses of more than 3% or 5%.

The money raised from selling these futures theoretically offset the losses in stocks. The system figured to work as long as futures prices remained in a realistic range relative to their underlying stocks.

But the preliminary reports from Chicago suggested the futures markets had suffered some kind of seizure.

Despite their fearsome reputation, futures are uncomplicated in theory: They are contracts for the future delivery of some commodity--wheat, soybeans, U.S. government bonds, stocks--at a pre-agreed price. Individuals enter informal futures-like arrangements all the time to counter the risks of changes in price or the supply of goods, as when a traveler commits himself to a guaranteed airline reservation at a discount price.

Nelson’s concern Monday morning was with stock-index futures, specifically the contract based on the Standard & Poor’s index of 500 New York Stock Exchange stocks, which was traded in the largest octagonal pit on the Chicago Mercantile Exchange floor.

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Broader-based than the Dow, the S&P; 500 index was closely watched by professional investors. Some, like Nelson, ran “index” funds, which were expected to exactly match the S&P;’s annual performance, whether the S&P; rose or fell over the course of a year.

Intently Followed

Futures gave these traders a means of mimicking the S&P; much more cheaply than simply buying and selling stocks. Commissions and expenses were much lower and the trading much faster in the futures pits.

So for the three years the S&P; futures had existed, stock investors and traders had come to intently follow the futures market. Because people buying and selling futures were expressing their mass view of the direction of stock prices over stretches of three or six months, futures prices often forecast the general trend of the stock market. In part this could be a self-fulfilling forecast, because the same traders often participated in both markets, buying in one and selling in the other to capture the subtle price differences periodically opening between the theoretically equivalent markets. The process was known as “index arbitrage.”

Monday morning, the futures pit was predicting a catastrophe.

As Nelson and his chief trader, Paul Brakke, heard it, the pit traders, overwhelmed by sell orders from traders around the country, had pegged the opening price of the S&P; 500 future at about 261 points.

The very number shocked the two young professionals. More than 18 points below Friday’s S&P; 500 close, the drop was greater than the index’s fall in Friday’s entire 6 1/2-hour trading session, its worst day of all time. And the stock market was not yet even open.

What is more, judging from the standard relationship between the S&P; index and the Dow, it meant that the Dow could open more than 150 points lower than the previous session’s close.

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Brakke and Nelson had been planning to sell stocks on Monday. “That opening iced the decision,” Brakke recalls. “For sheer magnitude, nobody had seen anything like it.”

Minutes before Monday’s opening, Druckenmiller saw the same indications. He knew the speculative bubble of 1987 had been pricked. “Now,” he thought, “nobody will be afraid to sell.”

Great orange digits ticked off the seconds left until 9:30 a.m. on huge clocks hung around the marble walls of the New York Stock Exchange. On the exchange floor James A. Jacobson mentally balanced the dribble of buy orders for United Technologies Corp. stock with the flood of sells. Jacobson, a partner of a family firm of specialists and a director of the NYSE, was an old master at handling trading in United Technologies, known by its ticker symbol UTX.

Prime Task

As the market day opens, the specialist’s prime task is to open trading in his stocks. This seldom happens at 9:30 sharp. It takes time for the specialist to match buy and sell orders and from them calculate the best opening price, not too low to discourage sellers or too high to drive off buyers. Ideally, the price will be within a couple of ticks, or eighths of a dollar, of the previous night’s closing price.

Across the main floor and its two adjoining trading rooms specialists overwhelmed by sell orders were having a horrible time. Only 11 stocks opened at 9:30, and the specialists responsible for big bellwether issues like IBM and General Motors weren’t close to getting the stocks open.

The IBM specialist, his account loaded with 130,000 shares following the buying binge he undertook in Friday’s market, eventually opened the stock for trading at 10:53, nearly 90 minutes after the exchange opened. The price was $124, down a jarring $10.50 from the closing price Friday. In that moment the specialist incurred a paper loss of $1.4 million.

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Each of these problems got communicated instantly through the financial community, and each spread more fear. As the minutes and then hours passed with the market’s most active stocks so overwhelmed by selling they could not even open for trading, people around the country shelved their buying plans or decided to join the flight. “If IBM, the most tradable stock on the floor, couldn’t get open, that was scary,” remarked one trader.

At 9:46 a.m. Jacobson, still balancing orders in UTX, finally said to himself, “the day has to start somewhere.” He opened the stock for trading at $46.50, down $2.25 from UTX’s closing price Friday, and bought 46,000 shares himself to take out surplus sellers.

Like specialists across the trading floor, Jacobson underestimated the selling tide. Thousands of sell orders immediately flooded in.

“If we had to do it again,” he recalled later, “we would have opened all those stocks lower. After I opened UTX it dropped down another dollar before I could even say hello.”

THE BLOODBATH

Shortly after the opening, Bankers Trust’s Paul Brakke was already giving up on the stock market.

Confronted with millions of transactions, the NYSE’s very machinery was clogged. By the time they appeared on a trader’s terminal, price quotes on stocks might be minutes old, meaning that in shooting a sell order to the floor he might be getting many dollars a share less than he expected.

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A similar backup was afflicting the electronic link through which massive orders were automatically routed to the specialists. Known as DOT, for “Designated Order Turnaround,” the system normally provides guaranteed trades of most blocks up to 2,000 shares--5,000 if the order was routed to the floor before the opening--within two or three minutes.

On this day DOT resembled the Long Island Expressway at rush hour. Brakke sent down a sell order for 5,000 shares of General Electric; an acknowledgement came back that 100 had been sold and 4,900 were still waiting. Nobody could rely on trades executed at such a dribble.

So on Black Monday Brakke was grateful for the futures market. “When I sent an order to the futures market, at least I knew what price I was getting,” he says. “With stocks you could only hope.”

Brakke’s cubicle just outside Nelson’s office was set off by movable partitions lined in gray fabric covered with Xeroxed cartoons, inside jokes and complicated graphs displaying multi-colored lines.

Three video screens displayed such electronic data as the price and movement of the S&P; 500 future, and a personal computer on the desk between them stored electronic stock portfolios Brakke could order bought or sold virtually with the flick of a switch, $25 million at a time. The procedure was known as program trading.

Many investors freely curse program trading. People consider it a kind of automatic mechanism that sucks the intellectual substance out of stock picking, turning an economic process into a mathematical game and subverting the hallowed principle of long-term investment in favor of short-term gain. Sometimes it is blamed for harrowing daily swings in stock prices.

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But Brakke’s goal was the same as any investor’s: buy low, sell high. He simply dealt simultaneously in two markets: the stock market, represented by the 500 stocks comprising the Standard & Poor’s 500 index, and the S&P; 500 future.

By culling the fleeting price difference, or “spread,” between futures and stocks from the information displayed on his terminals, he could decide whether to buy or sell the future or the stocks. One bought whichever was cheaper and sold whichever was more expensive.

Capturing the spread required split-second timing and the ability to get almost exactly the price displayed on the screens, something that could be accomplished only by sending the trade orders down to the floors en masse by computer.

Years of Disagreement

The effect of such tandem trading on the stock market has been the subject of years of disagreements between futures and stock exchanges. Each side has reams of complex studies purporting to prove the index futures either do or do not muscle the stock market around. Brakke’s and Nelson’s viewpoint--common among program traders--was that futures trading might have some transient effect on stock prices, but in the long run both markets accurately reflected what investors genuinely believed.

On Monday the futures market was in as much disarray as the stock exchange. The gap between the buyer’s bids for the futures and the sellers’ asking prices, also known as the “spread,” was grotesquely wide.

The reason was that the hundreds of small speculators, or “locals,” whose busy trading normally fueled the market, were standing aside. The scale of the selling frenzy could easily engulf them. The only traders left were brokers from big New York investment firms like Merrill Lynch and Morgan Stanley, who were standing in the huge pit running the contract prices down in huge jumps.

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Normally the bid-asked spread was a quarter; on Monday it widened to as much as $2, meaning a futures contract representing more than $125,000 worth of stocks at the moment of purchase was immediately devalued by $10,000. Still, Brakke pumped orders to both floors, lightening his portfolios as quickly as possible.

Meanwhile, at the New York Stock Exchange, Bob Fagenson was overwhelmed by program orders.

Standing at his post in the exchange’s blue room, named for its bright blue walls, the slight, sandy-haired specialist sometimes appeared to risk being trodden underfoot by Steve Amsterdam, his tall, burly partner who handled the volatile trading in Salomon Bros. with the body english of a boxer.

Preliminary studies by federal regulators, in the weeks after the crash, showed program trades like those being transmitted by Paul Brakke at Bankers Trust amounted to 9% of so of the total trading on Black Monday. Viewed as such a small slice of the total, the programs appear almost innocuous.

Yet from the vantage point of the floor there was no gainsaying their appalling impact. The programs, focused in the S&P; 500 stocks, magnified and concentrated the already intolerable selling pressure.

Fagenson’s terminal spit out oblong white cards carrying program orders onto the counter behind him, to be snatched by his clerk. At the opening the clerk was calling out sales of 800 shares at a time. By 10:30 they were a flood of 1,600 and 1,800-share blocks, then 4,900 at a time, bearing the brokerage codes of such well-known program brokers as Salomon Bros. and Morgan Stanley.

The worst thing about program orders was the utter irrelevance of price. A human floor broker, standing in the crowd in front of Fagenson with a large sell order, would work it carefully to force potential buyers to come up to or at least near to his price. That was the essence of professional floor brokerage.

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But to program trades only snap execution was important. In Monday’s near absence of buyers, every sale of a 4,900-share block forced Fagenson to take the stock down 50 cents, or a dollar, or more, looking in vain for a price at which other buyers would materialize.

At 11 a.m. the market rallied. Down 200 points on the day, over the next 45 minutes the Dow gained about 100 back.

On the floor the move was singularly unconvincing; in any event it was ruthlessly extinguished. One destructive influence was a hoard of backed-up short sales. These came largely from program traders who were buying futures and selling stock they did not own, expecting to repurchase the stocks later at a lower price.

The exchange allowed short sales to be executed only on an “uptick”--that is, after a trade that brought a stock at least one eighth-point higher. In the absence of upticks all morning short orders had piled up by the tens of thousands, like water in a reservoir poised to flood out a forest.

“Any rally was going to be short-lived and blunted by the program shorts sitting on top of the market,” recalls Fagenson.

SEC Chairman

If that was not enough, shortly before noon the Dow Jones news ticker flashed a story suggesting that David S. Ruder, chairman of the Securities and Exchange Commission, might consider shutting the NYSE to stem the collapse. Ruder quickly took back his words, but the damage was done. Anyone planning to sell figured he better do so while the exchange was still open.

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In the developing frenzy professionals throughout Wall Street saw the very nature of their business metamorphose.

On most days Tom Kane, head of the block trading desk at Bear Stearns & Co., a tall, rather shy man who commuted to work from New Jersey on a Hudson River boat filled with financiers and Wall Street traders, took calls from major clients wanting to buy or sell large blocks of stock.

Generally Bear Stearns would take the deal itself, committing its own money. If a client had stocks to sell the firm would buy the package wholesale. They would negotiate a price at which the firm could satisfy the client and yet make money by turning around and reselling its inventory in small trades on the stock exchange floor, but Bear Stearns took pride in executing these deals swiftly and efficiently.

On Black Monday clients had an overwhelming volume of stock for sale, but no one wanted to waste time negotiating a price even with a house as efficient as Bear Stearns. In the rapidly falling market clients had stopped asking Kane to bid on their shares.

“They knew that by the time you negotiated a price, they would have lost a couple of points,” he observed later. “So they said, just sell it for us.”

Mike Girardi could see the options market disintegrate. He felt he could call 200 brokers in the pit, some of whom had traded with him for years, and not find one who would quote him a price for a put option. “What do you want to do?” one asked, obstreperously.

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Gerardi’s clients were paralyzed. Earlier in the morning they had been desperate to buy puts to hedge the value of their collapsing stock portfolios. By midday puts had become too expensive. “There was no protection they could buy because the price was so exorbitant,” he recalls. “They had no choice. They had to sell stocks.”

On the exchange floor, the human brokers mimicked the machines more as the afternoon wore on and panic proliferated: Price was not important, only execution.

To Robert Jacobson, James’s brother and a specialist in such stocks as Waste Management Corp. and Bear Stearns & Co., it was clear that no one was inclined to stand in a noisy crowd and work an order. It could take 20 minutes or more.

One broker in front of him hastily unloaded 20,000 shares of Waste Management. Jacobson had offered to buy 5,000 shares for 75 cents below the last sale. Normally the broker would have hit the bid and waited for bids for the remaining 15,000 shares. This time he asked for one price for it all; Jacobson obliged him with a lower bid.

“He must have had a fistful of orders he had to get through in an hour,” he recalls. “He just wanted one price for it all, and he was happy to get it.”

Given his duty to be the buyer of last resort in the stocks he oversaw, Jacobson bought thousands of shares himself. His firm began the day owning about $17 million in stock; by the close of trading it owned $45 million, purchased at prices as much as 30% higher than they were at the close.

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Owned $2.7 Billion

The 52 specialist firms, whose trading is the institutional backbone of the New York Stock Exchange, normally end a trading day with a combined inventory of $300 million to $400 million in stock. At the close of Black Monday, they owned nearly $2.7 billion.

Some was tied up in stocks active enough for the firms to unload their costly inventory in the next two or three days. But millions were sunk into stocks so moribund in the aftermath of the crash that Fagenson despaired: “We’ll be leaving these shares to our children.”

Specialists across the floor could not believe the volume and pace of program sales. To this day many suspect the big investment houses of a wholesale violation of the short-sale rule. By not accurately marking their sell orders as short-sales, the reasoning goes, the big firms could execute key program sales without waiting for the all-important upticks. In the process they would drive the market relentlessly lower.

In the final hour the selling picked up steam. “That was when any vestiges of hope you had left were blown out the window,” Fagenson remembers. Confronted at his own post by a mob waving white order tickets imprinted in red with the word, “sell,” Bob Jacobson reflected: “The Dow might drop a thousand points.”

“The traders’ pattern had always been to buy the weakness,” he remembers. “That day they bought the weakness and it just got weaker.”

The specialists and other brokers waited out the only thing that could halt the debacle: the close of trading at 4 p.m. Elsewhere an eerie hush fell over trading rooms. No one wanted to buy, everyone had passed on all their sell orders, most stood by as spectators, silently watching the devastating numbers play out in glowing green on video monitors. The telephones had stopped ringing.

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“You had a sense of watching something awesomely powerful,” Druckenmiller says.

As they watched in the last hour, the Dow industrials fell 200 points.

That evening Bill King stopped with the rest of his trading staff at a bar not far from Nikko Securities’ building a few blocks from Wall Street. There was little conversation; it was all they could do to smile wanly and shake their heads at one another. One by one the traders begged off, saying they wanted to get back to their families.

On their minds was a prospect even more horrifying than the scene they had witnessed: the chance that another day like Monday would cripple the financial system itself. Brokerages could fail, the exchanges could shut down.

For an hour or two Tuesday things would in fact, look even bleaker, but then the market recovered. The most fearful predictions did not come to pass, but certainly the feeling they could had quickened the panic of the final hour.

Like thousands of people employed on Wall Street, Bob Fagenson spent a sleepless Monday night, contemplating the losses his firm suffered by buying thousands of shares all day at prices that were as much as 30% lower by the close.

“I lay in bed,” he says, “and I thought, ‘You’re 38 years old and you’re going to have to start all over.’ ”

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