Word: indexes
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Dates: during 1980-1989
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That is what happened on Oct. 19, contend many Wall Streeters, who blame in particular an instrument called the stock-index future. Traded largely in Chicago, such futures enable investors to place bets on the performance of New York stock indexes like the Standard & Poor's 500. The futures, first introduced in 1982, gave portfolio managers a chance to hedge their cash investments in the stocks that make up a particular index. But the futures also gave investors the opportunity to engage in index arbitrage, a practice in which they can reap quick profits from temporary, often minor discrepancies between...
Among the six major investigations of the crash, three concluded that computer-driven index arbitrage and a related strategy known as portfolio insurance were at least partly to blame for the speed and severity of the 508- point drop in the Dow Jones industrial average. The Brady commission, which the Reagan Administration appointed, contended in its report last January that Chicago's futures markets have gained inordinate leverage over New York because the two marketplaces play by such vastly different rules and fail to monitor their complex interactions...
...safeguard: a so-called circuit breaker that would interrupt trading in most U.S. financial markets for one hour if the Dow fell 250 points from the | previous day's close and for two hours if it dropped 400 points. In congressional testimony later in the week, Greenspan defended stock-index arbitrage and computer trading as forces for stability rather than volatility, enabling portfolio managers to reduce their risk...
Perhaps the hottest battlefront in the New York-Chicago conflict is between the New York Stock Exchange and the Chicago Merc, which trades the controversial S&P 500 index futures. Each side in the standoff is unwilling to make any major procedural changes for fear of losing turf. The New York exchange, which was slow in setting up its own financial-futures market, controls 10% of worldwide trading in such contracts; the Chicago exchanges' share is about 80%. Contends John Sandner, chairman of the Chicago Merc: "We were so successful that it caused everyone to want to take our success...
...investment houses choose this moment to scale back index arbitrage? Wall Street insiders cite a variety of reasons, but the clincher seems to have been the threat of one of their biggest clients, Maurice . Greenberg, head of the insurance giant American International Group, to stop doing business with companies that continue to profit from program trading. If the firms hoped their announcement would head off further criticism, they were quickly disappointed. At Senate committee hearings the next day, former Treasury Secretary Donald Regan took time off from promoting his new book to urge suspension of all index futures trades...