Word: indexed
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Dates: during 1980-1989
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...Brady report says that while the Black Monday crash was triggered by fundamental problems like the trade deficit, it was exacerbated by the complex and poorly controlled interactions between the New York Stock Exchange and the Chicago Mercantile Exchange, which dominates the trading of stock-index futures. If dangerous stock dives are to be avoided, the Brady group contends, Chicago and New York will have to play by similar rules. The commission's central recommendation is that one agency -- preferably the Federal Reserve -- coordinate the activities of all U.S. financial markets. Currently, the Securities and Exchange Commission regulates the stock...
...commission's proposal would bring under one master two radically different kinds of markets. An investor who buys stock gets tangible shares of a corporation, which can be held for the long term. The person who buys or sells a stock-index future, in contrast, is making a short-term bet on which direction the overall market is going to go in the near future, usually a month or less. Thus the Chicago Merc is used primarily by brokerage firms and speculators seeking quick profits, and by money managers who want to hedge their portfolios against losses in the stock...
...different as the two markets are, they have become inextricably linked through the computerized trading strategies carried out by big brokerage houses, pension fund managers and other institutional investors. One variation is called index arbitrage, in which traders try to make swift, sure profits by taking advantage of temporary discrepancies between the prices of stock-index futures and the actual stocks that make up the index. A related gimmick is portfolio insurance, in which money managers sell stock-index futures during a market decline to guard themselves against losses. Heavy use of these strategies can produce violent price swings...
...Brady report identified portfolio insurance and index arbitrage as culprits in the Oct. 19 crash. Desperate to cut their losses when the stock market began to fall, money managers sold huge numbers of futures contracts. So many traders were following the same strategy that the downward spiral of prices accelerated in both New York and Chicago, and everyone got burned...
Since portfolio insurance offered no protection to those who tried it on Black Monday, the technique has fallen into disrepute and relative disuse. But profitable index arbitrage is still popular and may have been responsible for a big part of last Friday's plunge. The Brady report suggested that such volatility might be curbed if the 12% margin needed for buying a stock-index future were brought more into line with the 50% required for stocks. That might dampen speculation at the Chicago Merc. Critics of this idea, however, point out that the big institutions that play the index arbitrage...