Word: traders
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Dates: during 1980-1989
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...quiet, at first, for 26-year-old Joseph Schmuckler, program trader for Kidder Peabody. The blinking number on his computer screen, which will signal him when it is time to unleash his electronic firepower, is advising him to wait. But suddenly the stock market begins to move downward, and the telltale digit on Schmuckler's screen starts changing like a countdown at Cape Canaveral. The trader and his two assistants erupt in a frenzy of shouted telephone conversations as they advise colleagues in New York City and Chicago to get ready for a blast of trading orders. "Strap on your...
That capability gave rise about three years ago to a particularly canny and complex form of program trading. It is a kind of arbitrage in which traders make lightning transactions to take advantage of fleeting discrepancies in the prices of related financial instruments in different markets. One of the most popular such plays involves the Standard & Poor's 500 index, which rises and falls according to the performance of 500 stocks. A program trader will use a computer's calculating ability to monitor constantly the difference between the level of the S&P index and the price...
...futures price, since it registers the market's expectations of where the actual S&P stocks are heading, often veers substantially above or below the current level of those stocks. When the futures price strays far enough from the real index, it creates a golden door for the arbitrage traders. They play both sides of the gap, knowing they will make money on the difference. For example, if an arbitrager sees the S&P futures price rising well above the S&P stock index, the trader would buy a package of the 500 stocks that make up the index, which...
Prices could swing up or down before the contract is settled on its expiration date, but because of the original gap in prices, the trader has already locked in a profit, often called synthetic cash. If stock prices rise, the arbitrager will make a handsome return upon selling the shares; the money lost on the futures side of the transaction will not be enough to offset the profit because the price at which the futures were sold was overly high to start with. In the opposite scenario, falling stock prices will cause the trader to lose money on the stocks...
...made stocks increasingly vulnerable to a long- dreaded deep "correction." Once the slide started last Thursday, it picked up incredible speed because of so-called program trading -- computer- triggered waves of selling. By 11 a.m., the Dow had sunk almost 30 points. "It was remarkable," said Marvin Breen, a trader for Merrill Lynch. "I looked up at the screen, and it was down 20 points. Five minutes later it was down 30. Five minutes later it was down 40. It just kept dropping." Breen's account was only somewhat exaggerated: by 2:30 p.m., the Dow's plunge had passed...