WEBVTT - How One Trader Won Big While Everyone Else Panicked on Black Monday 0:00:09.080 --> 0:00:13.400 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:13.480 --> 0:00:17.720 I'm Joe Wisenthal and I'm Tracy Alloway. So, Tracy, we 0:00:17.760 --> 0:00:20.440 have a lot of anniversaries coming up in terms of 0:00:20.760 --> 0:00:25.600 major financial news and events in financial history. Oh yeah, 0:00:25.680 --> 0:00:29.159 well we we have. Let's see the tenure anniversary of 0:00:29.240 --> 0:00:32.559 the two thousand eight financial crisis. That's next year. But 0:00:33.720 --> 0:00:37.400 even more importantly, I think we have the thirtieth anniversary 0:00:37.440 --> 0:00:40.360 of the movie Wall Street coming up in December. That's 0:00:40.360 --> 0:00:42.800 the one I'm the most excited about. That. That's the real. 0:00:43.120 --> 0:00:46.760 That's the real, That's the big one. I think we 0:00:46.840 --> 0:00:48.640 may have talked about it before, but I'm kind of 0:00:48.720 --> 0:00:53.080 dreading the next two years and hearing everyone, including many 0:00:53.080 --> 0:00:57.720 of our colleagues, just endlessly recant war stories about I 0:00:57.760 --> 0:01:01.320 was there the day this bank, uh you know, went 0:01:01.400 --> 0:01:04.120 bankrupt and here's the thing I wrote or whatever. It's like, 0:01:04.280 --> 0:01:07.080 we're going to have two straight years of that. Joe, 0:01:07.080 --> 0:01:09.039 I'm gonna love it, and I'm going to force you 0:01:09.160 --> 0:01:11.920 to sit through an entire Odd Thoughts episode where I 0:01:12.000 --> 0:01:15.760 just talk about September two tho all the great coverage 0:01:15.760 --> 0:01:21.280 you did during that time. But besides the movie, Wall Street, 0:01:21.880 --> 0:01:26.240 And besides the financial crisis, we are at another really 0:01:26.319 --> 0:01:31.399 important thirty year anniversary, and of course that is the 0:01:31.520 --> 0:01:36.960 thirty year anniversary of the Black Monday crash in Oh 0:01:37.200 --> 0:01:39.800 has it been thirty years already? Can you believe that 0:01:40.080 --> 0:01:43.240 we are old? We are old? You know? We think 0:01:43.240 --> 0:01:46.240 in our history is like, Okay, there was this crash, 0:01:46.400 --> 0:01:49.480 the stock market, um fell a lot in a very 0:01:49.480 --> 0:01:51.920 short period of time, and then the stock market recovered 0:01:51.960 --> 0:01:54.320 and then we kind of move on. But I think 0:01:54.520 --> 0:01:57.919 you would agree that there's a lot of fascinating stuff 0:01:57.960 --> 0:02:01.040 to unpack from this experience into in terms of what 0:02:01.160 --> 0:02:04.080 it tells us about how markets work and how traders 0:02:04.080 --> 0:02:06.280 work and all that kinds of stuff like that. Oh yeah, 0:02:06.360 --> 0:02:10.160 people have been drawing lots of parallels to Black Monday recently, um, 0:02:10.200 --> 0:02:12.160 and I'm sure we can get into that later. But 0:02:12.240 --> 0:02:15.600 more importantly, I think there's a tendency as we get 0:02:15.639 --> 0:02:17.880 further and further away from these events to kind of 0:02:17.919 --> 0:02:21.359 forget about what a big deal they actually were at 0:02:21.360 --> 0:02:25.120 the time. And Black Monday in particular was huge for 0:02:25.280 --> 0:02:29.880 markets and led to um some regulatory reform. But when 0:02:29.919 --> 0:02:32.480 you contrast it with what happened to two thousand and eight. 0:02:32.840 --> 0:02:37.600 It kind of seems like there was a fairly quick rebound. Um. 0:02:37.680 --> 0:02:41.440 But you know, the actual day, the actual event was 0:02:41.520 --> 0:02:44.639 just huge and full of drama. Not that I was there, 0:02:44.840 --> 0:02:47.920 but no, but from what from what we understand, I 0:02:47.960 --> 0:02:50.760 don't recall it either, and not that not too much 0:02:50.760 --> 0:02:52.359 of us had. I was seven years old the time, 0:02:52.360 --> 0:02:54.040 but I don't remember it in the news. I mean 0:02:54.080 --> 0:02:55.960 I was kind of aware of some stuff. Do you 0:02:56.000 --> 0:02:59.520 remember it? No, I was even younger. Um, I thought 0:02:59.560 --> 0:03:00.919 you were going to tell me that you were trading 0:03:01.000 --> 0:03:06.360 futures at the time, euro dollars or something. I was not. Anyway, 0:03:06.680 --> 0:03:09.240 I'm very excited about today's episode because we're going to 0:03:09.280 --> 0:03:14.440 be talking about someone who, unlike us, lived through Black Monday. 0:03:14.639 --> 0:03:17.800 He was an active trader. He still is active, but 0:03:17.880 --> 0:03:21.600 he was active during the crash, and he's known for 0:03:21.720 --> 0:03:25.919 having made crucial trades. Uh. The day after that performed 0:03:26.240 --> 0:03:28.880 very well. So I don't think, Um, I think we're 0:03:28.880 --> 0:03:32.560 going to get a very rare perspective on this event today. 0:03:32.800 --> 0:03:35.280 This sounds amazing. I want to hear all the anecdotes 0:03:36.320 --> 0:03:39.280 me too, So without further ado, I want to bring 0:03:39.320 --> 0:03:43.440 in Blair Hall he was the founder of Hall Trading 0:03:43.480 --> 0:03:48.160 Company in So just a couple of years before Black Monday. 0:03:48.240 --> 0:03:52.480 He's still active in proprietary trading. He has a firm 0:03:52.480 --> 0:03:56.240 called Catcham Trading. He even has his e t F 0:03:56.360 --> 0:04:00.320 that's based on his uh, you know, market timing. And 0:04:00.520 --> 0:04:04.440 he's featured in Black Monday Revisited, an oral history of 0:04:04.480 --> 0:04:07.560 the crash. It's put together by Richard Dewey. It's running 0:04:07.560 --> 0:04:11.640 in this month's issue of Bloomberg Markets magazine. It's really awesome, 0:04:11.680 --> 0:04:16.520 amazing oral history piece also features Peter Borish, Michael Lewis, 0:04:16.880 --> 0:04:20.120 Jim Chanos Now seemed to leb gotta check it out, 0:04:30.279 --> 0:04:33.520 so pretty much the perfect person to talk to about 0:04:33.640 --> 0:04:37.320 this historical episode. Blair Hall, thank you very much for 0:04:37.400 --> 0:04:40.320 joining the Odd Lots podcast. Sure, it's good to be 0:04:40.360 --> 0:04:42.880 with you. Joe tell us, First of all, I'm curious 0:04:42.880 --> 0:04:44.520 what did you make of our intro. Do you think 0:04:44.600 --> 0:04:49.159 we characterized, uh, the events of or we basically sort 0:04:49.160 --> 0:04:52.479 of framed its historical context? Well, and can you tell 0:04:52.520 --> 0:04:56.320 us what you were doing at that time career wise 0:04:56.360 --> 0:05:01.279 and professionally leading up to this big event. Well, at first, 0:05:01.320 --> 0:05:04.320 I think it isn't an important time First of all, 0:05:04.880 --> 0:05:08.800 um the eight seven crash was caused by some factors 0:05:08.839 --> 0:05:12.040 that we now know about, and as a result, we 0:05:12.120 --> 0:05:16.440 have made some market reforms that I think will reduce 0:05:16.760 --> 0:05:22.279 um the probability of a catastrophic event in financial markets, 0:05:22.279 --> 0:05:25.480 and as a result, volatilely will be less in the future. 0:05:25.920 --> 0:05:29.479 But it was it was a very crazy time. What 0:05:29.640 --> 0:05:32.279 happened is the market had gone through some It was 0:05:32.360 --> 0:05:34.400 down five percent the previous week, and then it was 0:05:34.440 --> 0:05:37.720 it was down. It was down on Monday, and and 0:05:37.800 --> 0:05:40.640 everybody knew that would be down again on Tuesday, but 0:05:40.800 --> 0:05:43.320 we didn't know to what an extent it would be down. 0:05:43.960 --> 0:05:48.320 And there was an event called um in portfolio insurance, 0:05:48.400 --> 0:05:51.880 or that there was an activity called portfolio insurance that 0:05:51.960 --> 0:05:56.719 really exacerbated the crash and caused this extreme movement all 0:05:56.760 --> 0:06:00.279 in all in just a couple of days. Whoever, We're 0:06:00.320 --> 0:06:03.360 gonna dig into all of that. But before we do, 0:06:03.600 --> 0:06:09.200 what were you doing before? While I was a market maker? 0:06:09.200 --> 0:06:12.000 Actually I had been a blackjack player before that, I 0:06:12.080 --> 0:06:15.440 was a card counter in Las Vegas. I had bought 0:06:15.440 --> 0:06:18.440 a seat on the Pacific Stock to change and then 0:06:18.480 --> 0:06:21.240 I had built a firm that had about twenty employers 0:06:21.560 --> 0:06:27.360 employees that we're making markets in UH index options and 0:06:27.560 --> 0:06:31.880 futures and stocks, and so we had a presence on 0:06:32.640 --> 0:06:37.320 most of the major exchanges um in at that time 0:06:37.480 --> 0:06:40.279 so UH. And one of the things we had is 0:06:40.279 --> 0:06:44.760 is a screen that would automatically provide option quotes. We 0:06:44.760 --> 0:06:47.360 were one of the first people to automate the process 0:06:47.480 --> 0:06:52.120 of creating quotes for as an options market maker. And 0:06:52.160 --> 0:06:54.599 I was on the Chicago Board of Options Exchange in 0:06:54.640 --> 0:06:59.520 the SPX pit which had just been really just been created, 0:07:00.240 --> 0:07:05.320 so that morning, Tuesday morning, that's where I was at 0:07:05.360 --> 0:07:08.040 that time with as part of a firm. We had 0:07:08.040 --> 0:07:12.720 a firm of about twenty people at that time. So 0:07:12.840 --> 0:07:17.560 from what I remember, options were booming in the nineties, right, 0:07:17.600 --> 0:07:21.000 and that was partially off the back of the creation 0:07:21.040 --> 0:07:23.520 of black shoals or the discovery of black shoals. Can 0:07:23.560 --> 0:07:26.720 you kind of walk us through what that market looked like, 0:07:26.960 --> 0:07:31.480 you know, the day before Black Monday or Black Tuesday happened. Well, 0:07:31.520 --> 0:07:34.520 the Chicago Board of Options Exchange was the largest exchange 0:07:34.520 --> 0:07:38.560 at that time, although the American Stock Exchange existed along 0:07:38.600 --> 0:07:43.200 with the Pacific and Philadelphia um so UM we had 0:07:44.480 --> 0:07:48.560 we were trading calls and puts on the sp a 0:07:48.640 --> 0:07:51.720 in a pit an open outcry at that time. Blair, 0:07:51.840 --> 0:07:55.640 There's so many things that I want to ask you, um, 0:07:55.680 --> 0:07:57.760 but I feel like I'm going to forget to ask 0:07:57.800 --> 0:07:59.600 you about this if I don't do it right now. 0:07:59.640 --> 0:08:02.880 But just briefly, tell us a little bit about the 0:08:03.000 --> 0:08:07.440 skill overlap between going from being a black jack card 0:08:07.520 --> 0:08:12.000 counter to a stock trader. We talk about gambling a 0:08:12.040 --> 0:08:14.880 lot in various ways on this podcast, but I'd love 0:08:14.920 --> 0:08:18.960 to hear it from your perspective. What specifically is the 0:08:19.040 --> 0:08:22.800 skill set that sort of transcends both things. Well, there 0:08:23.080 --> 0:08:26.360 are two skills really. One is dealing with risk and 0:08:26.480 --> 0:08:30.440 capital fluctuations. That's one skill, and then the second skill 0:08:30.520 --> 0:08:33.640 is dealing working with the team. I was part of 0:08:33.640 --> 0:08:37.200 a team playing black jack in Las Vegas, and so 0:08:37.600 --> 0:08:40.920 um both of those skills. First of all, the capital fluctuations. 0:08:41.000 --> 0:08:43.240 Even though you have an advantage in any kind of 0:08:43.240 --> 0:08:46.520 a game or a marketplace, you will have capital fluctuations 0:08:46.800 --> 0:08:50.280 and capital draw downs. You will go through bad periods, 0:08:50.600 --> 0:08:52.679 But you have to understand that you do have an 0:08:52.720 --> 0:08:55.120 edge in the long run and have faith in that, 0:08:55.520 --> 0:08:58.080 and you have to be able to withstand those losses 0:08:58.120 --> 0:09:01.840 and stay in there and keep operating, operating in a 0:09:02.000 --> 0:09:06.560 rational and objective way throughout that time. So it's emotional. Uh, 0:09:06.600 --> 0:09:10.320 it's it's really Uh. Learning to deal with your emotions 0:09:10.440 --> 0:09:12.120 is part of it. And the other part is that 0:09:13.000 --> 0:09:15.400 you need to be able to work with other people 0:09:16.000 --> 0:09:19.040 in a collaborative way, and that skill, of course is 0:09:20.240 --> 0:09:23.120 very important also. And is this so that in the 0:09:23.200 --> 0:09:26.679 context of blackjack, so that the casinos don't recognize you 0:09:26.840 --> 0:09:31.079 as a card counter being recognized as another issue completely 0:09:31.280 --> 0:09:34.800 from Uh. No, No, that that wouldn't be. It's it's 0:09:34.840 --> 0:09:39.400 just in terms of um, just working on a team. UM, 0:09:39.559 --> 0:09:46.400 people that do significant things collaborate with others. So Joe 0:09:46.480 --> 0:09:52.440 always brings it back to either gambling or chess usually, Uh, 0:09:52.600 --> 0:09:54.920 just to stick to the theme. I mean there there 0:09:55.040 --> 0:09:59.560 is a link between UM gambling in Vegas, say, and 0:10:00.000 --> 0:10:04.080 Black Shoals and Black Monday, right like people talk about 0:10:04.080 --> 0:10:08.360 the Kelly criterion and Ed Thorpe and Martin Shoals. Can 0:10:08.400 --> 0:10:10.080 you kind of square that for us or give us 0:10:10.120 --> 0:10:13.200 the background? I always say it's getting an edge and 0:10:13.280 --> 0:10:15.520 staying in the game. Staying in the game is knowing 0:10:15.559 --> 0:10:17.600 how much money to put on the table at any 0:10:17.600 --> 0:10:20.680 one time, and if you lose half your bank roll 0:10:21.320 --> 0:10:24.520 or half your trading account, you must reduce your size 0:10:24.679 --> 0:10:29.000 of your positions by half uh and so that relates 0:10:29.000 --> 0:10:33.959 to the Kelly criteria. Knowing how much too um capital 0:10:33.960 --> 0:10:36.280 to put at risk at any one time and being 0:10:36.320 --> 0:10:40.640 able to adjust that as your capital either increases or decreases. 0:10:41.280 --> 0:10:45.160 Let's go back to the events of Black Monday. So 0:10:45.240 --> 0:10:48.000 one thing I realized we didn't say is that how 0:10:48.040 --> 0:10:51.440 bad Black Monday was if for people not familiar with that, 0:10:51.520 --> 0:10:57.360 the Dow fell over in one day absolutely points famously, 0:10:57.760 --> 0:11:00.720 which you know, these days may not be that much 0:11:00.800 --> 0:11:04.120 or kind of you know, a volatile day, but just 0:11:04.240 --> 0:11:07.720 an absolutely extraordinary one day sell off, the likes of 0:11:07.800 --> 0:11:11.600 which financial markets had really not seen before on such 0:11:11.600 --> 0:11:14.920 a grand scale. There's also crashes all around the world. 0:11:15.720 --> 0:11:19.160 But let's go to that Tuesday. So walk us through 0:11:19.240 --> 0:11:23.480 the event. Obviously everybody completely fried or stunned by the 0:11:23.520 --> 0:11:26.160 events of the day before. Tell us about how you 0:11:26.200 --> 0:11:30.320 were thinking going into the markets that Tuesday morning and 0:11:30.320 --> 0:11:34.800 how people were behaving. But we had screens that actually 0:11:34.800 --> 0:11:39.760 displayed our prices in the SPX pit at the Chicago 0:11:39.800 --> 0:11:42.800 Board of Options extrains, and so these were prices that 0:11:42.840 --> 0:11:46.960 you allegedly to trade on, and in today's market you 0:11:47.040 --> 0:11:50.800 can trade on them. In those days, they were representative quotes, 0:11:51.360 --> 0:11:55.400 and so we give gave our best estimate of where 0:11:55.480 --> 0:11:58.640 volatility was. And I don't have the exact numbers here, 0:11:59.160 --> 0:12:01.320 but I think we were seen that volatily would have 0:12:02.120 --> 0:12:05.960 risen from something like twenty to forty. But when implied 0:12:06.000 --> 0:12:10.439 volatively opened at sixty, it was as a mark. As 0:12:10.440 --> 0:12:13.640 the lead market maker in the SPX pit, we were 0:12:13.720 --> 0:12:17.400 essentially run over by orders. We could not respond fast 0:12:17.480 --> 0:12:21.240 enough to these, uh move our markets fast enough to 0:12:21.360 --> 0:12:24.480 even stay somewhat in the game. Uh. It was an 0:12:24.640 --> 0:12:28.840 extremely stressful time where everybody was fighting to get any 0:12:28.920 --> 0:12:32.080 kind of protection they could. On the downside, so an 0:12:32.080 --> 0:12:36.680 open alcry pit, people are physically trading, right you're were 0:12:36.720 --> 0:12:39.679 you doing the hand signals and all of that? Oh 0:12:39.760 --> 0:12:43.000 it's voice and hand signals, yes both. So what was 0:12:43.040 --> 0:12:47.960 the atmosphere like then on that day When there's an 0:12:47.960 --> 0:12:51.319 extreme move either way? Uh, there is usually and there 0:12:51.520 --> 0:12:55.160 was at that time a Uh, there were a lot 0:12:55.200 --> 0:12:58.480 of people in the pits. And when I alluded to 0:12:58.880 --> 0:13:02.440 I think earlier we talked about how later in the week, 0:13:02.920 --> 0:13:06.480 as actually people were so scared and the FED had 0:13:06.600 --> 0:13:10.400 increased capital requirements, we actually had there were fewer people 0:13:10.440 --> 0:13:13.600 in the pits later in the week, but that morning 0:13:13.679 --> 0:13:17.960 it was extremely chaotic and nobody knew what was going 0:13:18.040 --> 0:13:21.840 to happen. So what did markets do in the early 0:13:21.960 --> 0:13:25.120 hours of that Tuesday? And then what did you do 0:13:25.320 --> 0:13:28.400 in particular to sort of, you know, take a spot 0:13:28.440 --> 0:13:31.960 an opportunity in the cast and why did you sense 0:13:32.000 --> 0:13:34.840 that there was an opportunity. Then what happened is in 0:13:34.880 --> 0:13:39.040 the market actually rallied Tuesday morning, but then it continued 0:13:39.080 --> 0:13:42.760 to sell off, and we suspect that was because of 0:13:42.800 --> 0:13:46.160 the portfolio insurance orders that had not been executed from 0:13:46.160 --> 0:13:50.920 the previous day. So the market UM had a steady 0:13:51.000 --> 0:13:55.560 decline UM at that time, we UH the Chicago Board 0:13:55.760 --> 0:13:59.720 of Trade had a contract called the Major Market Index, 0:14:00.520 --> 0:14:03.960 and we were one of the one of the larger 0:14:04.000 --> 0:14:09.440 market makers trading across index products, so we had UM. 0:14:09.520 --> 0:14:12.720 We had positions in the New York Stock Exchange Index 0:14:13.080 --> 0:14:16.960 on the n y A, and we had a position 0:14:17.640 --> 0:14:20.640 in the the o e X and the sp X. 0:14:20.720 --> 0:14:22.680 At the in the SPX, and we also had a 0:14:23.120 --> 0:14:26.800 position in the Major Market Injects at the Board of Trade, 0:14:26.840 --> 0:14:30.440 which was a mirror of the Dow average, so it 0:14:30.520 --> 0:14:34.760 was included twenty stocks twenty large stocks. We had positions 0:14:34.840 --> 0:14:37.120 all across the board and had to keep track of 0:14:37.200 --> 0:14:40.720 whether we were we were trying to stay neutral relative 0:14:40.800 --> 0:14:44.120 to the marketplace. But the reason that I had to 0:14:44.160 --> 0:14:48.040 go over to the Major Market index was that, um 0:14:48.800 --> 0:14:53.480 there were no brokers in the pit that could execute 0:14:53.480 --> 0:14:57.000 our orders because the murk, the Chicago Merchantil and the 0:14:57.000 --> 0:14:59.360 Board of Trade had said you must have at least 0:14:59.400 --> 0:15:02.280 a hundred thousand dollars in your account as a broker 0:15:02.320 --> 0:15:05.080 to execute orders for other people, and as a result, 0:15:05.200 --> 0:15:09.600 many brokers were excluded from participating, and there was no 0:15:09.720 --> 0:15:13.600 broker outside broker that could trade for us. Normally we 0:15:13.640 --> 0:15:16.280 went through a broker in that pit, but I happened 0:15:16.320 --> 0:15:22.160 to have the full Board of Trade seat, and so 0:15:22.240 --> 0:15:24.960 I could go over and personally trade. So, even though 0:15:24.960 --> 0:15:26.720 I was the head of the firm at that time 0:15:27.160 --> 0:15:31.960 and would not normally be doing at trading in one 0:15:31.960 --> 0:15:35.600 of those futures bit pits, I did go. I did 0:15:35.760 --> 0:15:37.760 walk across the street from the cbo E to the 0:15:37.800 --> 0:15:41.320 border trade. You jumped in. But this is this is 0:15:41.360 --> 0:15:43.840 what I want to ask, because in the two thousand 0:15:43.920 --> 0:15:48.120 eight financial crisis, one of the accusations thrown at some 0:15:48.200 --> 0:15:50.800 of the big market makers was that they just stopped 0:15:51.240 --> 0:15:55.280 picking up their phone um and taking orders. Was there 0:15:55.320 --> 0:15:58.560 any of that? On Black Tuesday? I realized some people 0:15:58.600 --> 0:16:01.080 couldn't trade because they didn't have enough capital. But did 0:16:01.080 --> 0:16:03.520 anyone just kind of throw their hands up and walk 0:16:03.560 --> 0:16:07.200 away and say this is too much? Yes? Essentially, the 0:16:07.240 --> 0:16:09.720 specialists in New York, we're not picking up the phone. 0:16:10.200 --> 0:16:12.560 In Chicago, there was a pit, So there were those 0:16:12.600 --> 0:16:15.800 people that were there, and some of them would be 0:16:15.960 --> 0:16:20.120 quiet and others would open their mouth. Uh. In fact, 0:16:21.120 --> 0:16:23.440 one of the one of the things I actually learned 0:16:23.480 --> 0:16:26.880 from a colleague over the Chicago Board of Options Exchange 0:16:27.320 --> 0:16:30.840 by the name of John Stafford. We had traded together, 0:16:30.920 --> 0:16:33.760 and one of the things that he did is he 0:16:33.760 --> 0:16:36.000 he said that when somebody comes in with an order, 0:16:36.720 --> 0:16:40.040 you always respond to them, even if you can figure 0:16:40.080 --> 0:16:42.440 out what the price should be, because these are complicated 0:16:42.480 --> 0:16:46.400 options trades and future trades. But do you always respond 0:16:46.440 --> 0:16:49.600 to them it maybe with a ridiculous price with an 0:16:49.600 --> 0:16:52.760 extremely wide market, but you always respond. So I was 0:16:52.800 --> 0:16:57.320 in the mode of always responding to which sometimes can 0:16:57.360 --> 0:17:00.480 get you into trouble, but in this case to work 0:17:00.520 --> 0:17:13.160 to buy advantage. Fill in the details there in terms 0:17:13.160 --> 0:17:15.520 of how it worked to your advantage. You you had 0:17:15.520 --> 0:17:19.360 this opportunity of essentially being the only person in this 0:17:19.440 --> 0:17:22.479 position that you were in. How did things then, uh 0:17:22.640 --> 0:17:25.399 sort of settle out for you in the days and 0:17:25.400 --> 0:17:29.560 weeks ahead? Well that first of all, the key was 0:17:29.640 --> 0:17:34.879 that morning when the market continued to decline, and of 0:17:34.880 --> 0:17:37.120 course it looked like it was never going to end. 0:17:38.040 --> 0:17:41.639 And so what what I did was that I was 0:17:41.680 --> 0:17:44.719 in the major market um kids, and I had been 0:17:44.760 --> 0:17:48.159 a small buyer trying to reduce our short position. So 0:17:48.240 --> 0:17:51.240 I was buying five small lots of twos and threes 0:17:51.280 --> 0:17:55.040 and fours and fives to to try to reduce our position. 0:17:55.760 --> 0:17:58.760 But there was a rumor that they were going to 0:17:58.880 --> 0:18:02.840 halt trading on the Chicago and Chicago mercantile in the 0:18:02.880 --> 0:18:06.680 futures contract that was the big contract. And so if 0:18:06.720 --> 0:18:09.640 they halt at that, I was fearful that they would 0:18:09.640 --> 0:18:12.760 halt for a couple of days. Even so I actually 0:18:12.800 --> 0:18:15.359 sent I actually asked somebody from the firm to go 0:18:15.440 --> 0:18:19.240 over to the library and do research to determine what 0:18:19.440 --> 0:18:23.560 happens on trading halts. Now, this was a completely ridiculous 0:18:23.600 --> 0:18:26.600 request because we obviously didn't have time. We only had 0:18:26.600 --> 0:18:28.480 about twenty people in the firm. We didn't have time 0:18:28.520 --> 0:18:30.520 to send somebody over the library in those days, and 0:18:30.600 --> 0:18:33.280 we didn't have Google. I had a sense that if 0:18:33.320 --> 0:18:35.399 they were going to halt trading, that this was a 0:18:35.440 --> 0:18:39.880 buying opportunity, because uh, the panic had gone too far, 0:18:40.440 --> 0:18:42.880 and so I told told the firm to be long 0:18:42.960 --> 0:18:46.680 on the halt um. So we were acquiring a position 0:18:46.720 --> 0:18:49.760 and all at this time. Well, it ends up that 0:18:50.240 --> 0:18:53.959 um Drexel Burnham, of course, a firm that doesn't longer exist, 0:18:54.160 --> 0:18:57.639 has had a seller who was selling his position, and 0:18:57.680 --> 0:19:00.480 they needed to sell this position. I guess the clients 0:19:00.520 --> 0:19:03.119 that we need to sell it. They knew that it 0:19:03.200 --> 0:19:06.760 was a very orderly pit. And one of the things 0:19:06.760 --> 0:19:09.199 that happened was that Pat Harbor, who was Chairman of 0:19:09.200 --> 0:19:11.120 the Board of Trade at that time, did not get 0:19:11.240 --> 0:19:15.520 enough credit for actually keeping that market open the entire time. 0:19:16.160 --> 0:19:19.800 And it was a very orderly market with about old 0:19:19.840 --> 0:19:24.280 no more than twenty participants, but I wish he had. 0:19:24.280 --> 0:19:27.399 He should have gotten more credit for not panicking and 0:19:27.480 --> 0:19:31.520 closing the markets. So as things started to decline, Drexel 0:19:31.560 --> 0:19:34.720 Burnham had a big order to sell, and knowing that 0:19:34.840 --> 0:19:37.800 I was I had been probably the only buyer in 0:19:37.840 --> 0:19:42.320 the in the pit, consistent buyer. UH. They said where 0:19:42.320 --> 0:19:44.119 were you buy a hundred? And I gave him a 0:19:44.200 --> 0:19:48.879 ridiculous price, and they said you own him. I was 0:19:48.880 --> 0:19:52.879 scared to death, had a big of my throat, and 0:19:53.280 --> 0:19:55.800 UH immediately told the firm that we were a long 0:19:56.080 --> 0:20:01.000 A hundred contracts was an extremely large trade. UM. And 0:20:01.040 --> 0:20:02.960 I think that one of the things is the market 0:20:03.000 --> 0:20:06.719 was trading extremely wide increments. UH. It had normally traded 0:20:06.760 --> 0:20:09.919 in five and ten cent increments, so it was trading 0:20:09.960 --> 0:20:12.000 about two ninety It would have been two ninety and 0:20:13.000 --> 0:20:15.240 five cents at ten cents. In this case, it was 0:20:15.280 --> 0:20:17.600 two ninety at two ninety five, and there was a 0:20:18.440 --> 0:20:21.440 h There were bids at two ninety. He actually because 0:20:21.440 --> 0:20:23.439 it was a large contract, he said, I'll tell him 0:20:23.440 --> 0:20:25.760 at two eighty five. So I bought these contracts at 0:20:25.760 --> 0:20:29.160 two eight five trades to eighty seven, trades to eighty 0:20:29.240 --> 0:20:32.280 eight and he says, then I'll sell you. Then the 0:20:32.359 --> 0:20:38.560 fifty at the five. I bought them and considered. I 0:20:38.720 --> 0:20:41.560 considered sharing some of those contracts with the rest of 0:20:41.560 --> 0:20:44.600 the pit. And by the time I didn't think it happened, 0:20:44.600 --> 0:20:47.080 it was trading. It was two ninety bid, it was bid, 0:20:47.160 --> 0:20:50.000 and later in the day I think it finished somewhere 0:20:50.280 --> 0:20:54.399 in the three sixties, three sixty three, seventy. So it 0:20:54.520 --> 0:20:58.439 seems so simple in retrospect that you kind of stayed 0:20:58.440 --> 0:21:01.960 calm and started buying when other people were really panicking 0:21:02.000 --> 0:21:05.960 and selling. What was it that you saw that other 0:21:06.040 --> 0:21:09.040 people like drex Sol didn't or what was it about 0:21:09.040 --> 0:21:12.080 your position that allowed you to do that but prevented 0:21:12.119 --> 0:21:15.800 them from doing a similar thing. Well, I was providing liquidity, 0:21:16.200 --> 0:21:18.720 so they were. They were forcing the market. I did 0:21:18.800 --> 0:21:22.440 have a sense. I did know that. Um I didn't know, 0:21:22.520 --> 0:21:25.960 but I had a sense that a trading halt provided 0:21:25.960 --> 0:21:29.560 an opportunity. So that was the reason that I provide 0:21:29.640 --> 0:21:32.520 liquidity on that side especially, And it was also in 0:21:32.600 --> 0:21:36.680 conjunction with the fact that the the FEDS had had 0:21:37.000 --> 0:21:41.280 had raised margins, so we then also had to reduce positions. 0:21:41.280 --> 0:21:42.800 So I was in the right place at the right 0:21:42.800 --> 0:21:47.680 time with some sense that this was this was an opportunity. 0:21:48.119 --> 0:21:50.760 So we have to just about wrap it up here. 0:21:50.800 --> 0:21:55.560 But I have one very quick question, one slightly longer question. 0:21:55.600 --> 0:21:57.480 The first question is can you tell us you know 0:21:57.520 --> 0:22:00.439 how much in the end your firm made from the trade. 0:22:00.680 --> 0:22:04.119 But more importantly, as we look at the market now 0:22:04.160 --> 0:22:07.639 and people worry about whether we see things like the 0:22:07.680 --> 0:22:12.399 echoes of portfolio insurance re emerging and other sort of 0:22:12.480 --> 0:22:14.840 volatility products and so forth, what do you think are 0:22:14.880 --> 0:22:18.280 the key things to understand about the vulnerabilities of market 0:22:18.280 --> 0:22:24.040 structure today. Well, I think in retrospect, I actually do Mark. 0:22:24.200 --> 0:22:28.280 I do know Mark Rubinstein, who was really the creator 0:22:28.480 --> 0:22:33.000 of portfolio insurance, And actually I have a house in California, 0:22:33.160 --> 0:22:37.000 and he was at a party at my house after 0:22:37.040 --> 0:22:41.520 the crash, must have been early November, and he was 0:22:41.640 --> 0:22:46.840 so sad. He was distraught. He said I caused the crash. Later, 0:22:47.040 --> 0:22:50.160 even though it wasn't well known at that time, it 0:22:50.320 --> 0:22:55.560 was in fact true that the crash was exacerbated by 0:22:55.640 --> 0:23:00.720 portfolio insurance, which now today with the look quidity that 0:23:00.840 --> 0:23:04.040 is in the market, is probably a very viable product. 0:23:04.800 --> 0:23:08.399 He was distraught, He's a very honorable man, and he 0:23:09.240 --> 0:23:14.679 along with us Heine Leland and John O'Brien, they were 0:23:14.920 --> 0:23:22.360 the founders of portfolio insurance. But now with the circuit 0:23:22.400 --> 0:23:28.600 breakers and the tremendous liquidity is provided by by proprietary traders, 0:23:29.280 --> 0:23:32.320 I think portfolio insurance now is a viable product where 0:23:32.320 --> 0:23:35.439 it wasn't at that time. So it's just two ahead 0:23:35.440 --> 0:23:38.800 of the time, Blair, Can I just press this issue, um, 0:23:38.800 --> 0:23:41.600 because a number of people have brought up parallels to 0:23:41.760 --> 0:23:46.120 portfolio insurance. So for instance, UM, the risk parity strategies 0:23:46.160 --> 0:23:49.680 that kind of assume a relationship between bonds and equities, 0:23:50.040 --> 0:23:55.639 various types of programmatic trading, sometimes even volatility trading. Do 0:23:55.720 --> 0:23:59.480 you see any parallels between you know, a potential black Monday, 0:23:59.520 --> 0:24:02.840 Black twos a situation and some of those more modern strategies. 0:24:03.760 --> 0:24:07.960 I haven't thought about this, uh to a large extent, 0:24:09.840 --> 0:24:12.680 but I don't think there's UH. I mean, at that 0:24:12.720 --> 0:24:15.760 time this was a tremendous There was a tremendous amount 0:24:15.840 --> 0:24:19.000 of money in this strategy relative to the liquidity that 0:24:19.080 --> 0:24:22.640 could have been provided. I think they're more diverse strategies now. 0:24:23.440 --> 0:24:28.239 Risk parity is can be adjusted over UM periods of 0:24:28.240 --> 0:24:31.080 time that have to do with the volatility of each instrument, 0:24:31.960 --> 0:24:36.480 and so as a result, those adjustments occurred on a 0:24:36.720 --> 0:24:40.280 on a more gradual basis. Um, I don't see one 0:24:40.320 --> 0:24:45.439 strategy that is overwhelming the others, and so with the 0:24:45.480 --> 0:24:47.720 circuit breakers that we have in place, I think that's 0:24:47.760 --> 0:24:52.479