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Ira,
Your recount of the facts of 10/87 is both interested and flawed. It also omits a
lot of material information. First the events of 10/20/87 resulted in tens of
millions of doillars in restitution being made to option users. Over $11,000,000 was
contributed by the CBOE both in direct restitution and class action settlements.
Volatility was huge .... VIX calculated 150.2 at the high and volatility was extreme
throughout the day. The VIX numbers was, as you say, noy calculated back then ..
the number was created from data from the day calculated by CBOE research. The
extreme volatilit existed for a few days which is the issue. I was also on the
floor on 10/19 and 10/20 as I ran part of the media center for CBOE.
The big difference is that with VIC the extreme volatility would not have occurred.
The opened the market to accomadate his trade ... everyone knew the siz and scope of
his position .. they ran the vol. to over 60 and as soon as he was done it went
right back down.
If you trade with the knowledge of the size and character of a customer order prior
to it's introduction into the pit you violate about 1/2 dozen exchange rules in the
securities industry.
I brokerage house failed and tapped the OCC account. I can't remember any bank
buying a clearing firm. I can remmeber one bank, Continental which already owned
First Options on 10/87, later selling it back to Speer Leads, but I don't recall any
clearing failure that resulted in a bank's acquistion. Remember in 87 Glass
Steigal a pretty big issue and banks were really heavily restricted as to their
securiities activity. Continental couldn't keep First Options errors because they
could have direct ownership of securities on that side of the bank.
They bagged Niederhoffer and I wouldn't be surprised to see some significant legal
relief... just as the securites industry provided in 1987.
Ira wrote:
> I have a pretty good idea of the facts. I was on the floor on that Friday and
> that Monday. I saw the OEX options go to extreme volatilities. They weren't
> keeping a VIX at the time, but I saw options 50 and 60 points out of the money
> trading at 65, there was an extreme to remember. ON another occasion I stood in
> a pit and bought calls at 3/4 and immediately sold them across the pit at $5,
> that was how big the disparity got at times in fast markets. who was at fault?
> Me for making the trade? The floor broker for executing the trade? the floor
> broker on the other side of the pit that would pay anything for the call? How
> many market makers who made a living year after year selling outside
> combinations went broke big time and took huge chunks out of the clearing
> corps? Did you see a clearing corp. go out of business? I didn't. I saw some
> merge. I saw banks take over clearing corps. But I don't remember one going
> Chapter 11 or 7. what about the two Chicago banks that were technically
> bankrupt because of clearing corps they bankrolled? what the Merc did was
> wrong, if relayed the way you state it. What the floor traders did was
> expected. Do you think that Vic would have cared about them if he was able to
> do the same thing? Those in power, with capital at risk, will do anything they
> have to in the protection of their assets and the rest be damned. I have seen
> banks and firms come into the pits and do huge amounts of options and then guess
> what? The stock moves or an announcement comes out that affects the stock. I
> haven't seen huge judgments against this everyday occurrence. Maybe things have
> changed in the last 14 years, but I don't think so. The market makers in the
> pits at the CBOE are no different then those at the merc, and if Vic would have
> come in with the same order there, I believe the result would have been the
> same. Ira
>
> THE DOCTOR wrote:
>
> > Ira,
> >
> > You have absolutely no idea as to the facts. In 1987 you could not have
> > orderly markets.
> > OEX closes when more than 20% of the market cap is not trading. In 1987
> > that meant if IBM was closed the OEX closed. The implied vol. in the SPX
> > options at the MERC was well above the implied vol. at CBOE. If you read
> > the article in the Chicago Tribune you reference to market quality at CBOE
> > versus the MERC. He came into the CME pit to cover with the market down
> > over 300 .... REFCO had allegedly, already taken control of the account as
> > they knew they owned the debit. Coming back in the next morning when the
> > whole pit had know ledge of the order, it's character and size. How would
> > you react if you tried to exit a trade and your broker had telegraphed your
> > intentions to everyone and the exchange allowed the trade to occur. The
> > markets were open and trading when they ran the vol. to over 60%. People
> > came into the pits with knowledge of size and character of a customer order
> > .. it was like shooting fish in a barrel. Everyone knew ...Everyone. When
> > they completed his execution the took almost 30 vol. points back out. He
> > was dry-cleaned.
> > I would not be surprised if the courts found in his favor. An exchange has
> > an obligation to provide fair and orderly markets or close. There were no
> > fair and orderly markets ... just a brief, violent execution. When he was
> > being filled you could sell 10 point spreads for 11 points at the prices
> > they filled him. Anyone who had any clue as to how to trade options on that
> > day found themselves unable to trade fast enough if they were trading CME
> > options.
> >
> > Also if you want to quote the event of 1987 remember that the securities
> > exchanges
> >
> > 1. Adjusted trades and made restitution to customers as well as settling a
> > series of lawsuits for $10,000,000... the basis fore the lawsuits was the
> > lack of a fair and orderly market on 10/20.
> >
> > Ira wrote:
> >
> > > Look what happened in 87. They stopped trading in the OEX, when that
> > > reopened, they stopped trading in the S&P, then they stopped trading in
> > > the key stocks like IBM. there was no place to hide or to cover. No
> > > sooner did they reopen one, then they closed them again. The stock
> > > exchanges aren't saints either. When the blood flows, who do they look
> > > to save first? certainly not the public! Then government came and
> > > extended unlimited credit to guess who? once again, not the public. So
> > > the answer is when you go , go big so that the powers have to make you
> > > a partner, not a victim. If Vic had gone down for a Billion or two more
> > > then the funds had, there would have been a different solution. Ira
> > >
> > > THE DOCTOR wrote:
> > >
> > > > In spite of the fact that I work for an exchange .. it is
> > > > very difficult to defend the MERC on this one. He was
> > > > screwed. The early closing on the day the market declined
> > > > 500 occurred while his orders were already in the pit. His
> > > > broker(Refco)was going through a panicked liquidation and
> > > > telegraphed their intent to the entire community. By the
> > > > time the market reopened the next morning(at a 60% implied
> > > > vol)he was DOA before trading even started. In the
> > > > securities industry, the kind of practices that are
> > > > commonplace in the futures industry, would be felonies.
> > > >
> > > > Refco was, alleged, very sloppy. The only one in the
> > > > Chicago marketplace who didn't know what was being traded,
> > > > how much and anxious they were to exit would have to have
> > > > been someone deaf, dumb and blind. I wonder how any of us
> > > > would fell if we had a large short person and he whole world
> > > > knew we were coming to cover. Vic was one of the better
> > > > traders and he was _ucked royal.....sorry about the
> > > > expletive. Lots of individual investor who traded on those
> > > > two days were also hurt by the action and there were lots of
> > > > trade adjustments made.
> > > >
> > > > If there is a condemnation to be made, IMHO, don't close the
> > > > markets prematurely ... let the marketplace work.
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