Solly, 1987: Hero or Villain?

John Authers made the mistake of stepping onto Floyd Norris’s turf in the FT

on Friday. He blamed

Salomon Brothers (in part) for the severity of the 1987 crash:

Rob Arnott, now the head of Research Affiliates, was a global equity strategist

at Salomon Brothers at the time. It was his job to monitor the likely demand

for portfolio insurance. After Friday’s loss, he calculated that portfolio

insurers alone would start the day seeking to sell more than the market’s

average volume for an entire day.

Once he took this to his superiors, Salomon’s response was to order its traders

not to take the other side of the trade. Mr Arnott suspects the other big

Wall Street firms took the same stance. So the effect was as if the portfolio

insurers were selling into a vacuum, with the prices on offer to them marked

down and down.

Now Norris was actually physically present on the Solly trading floor that

day, which gives him license to post a rebuttal headlined "It

Never Happened". In fact, Norris goes further than that: not only did

the don’t-buy order never happen, he says, but in fact Solly was instrumental

in turning the market around by being the very first to buy.

On the trading desk, we heard that the Chicago Mercantile Exchange was considering

whether to halt trading in futures on the Standard & Poor’s 500

stock index because there was no way for traders to value the index with so

many stocks not trading.

It was then that Mr. Shopkorn did an extraordinary thing. He talked to Robert

Mnuchin, the head trader at Goldman Sachs, and they agreed to send word to

the floor that their two firms would buy stock that was being offered in order

to get S.&P. 500 stocks opened. (I did not hear that conversation, but

Mr. Shopkorn told me about it a few minutes later.)

It was just after that word was sent out that the market began to turn around.

I can’t prove it, but I think that was the reason the panic halted.

I trust Norris on this one, if only because I can’t believe that a mere strategist

would be able to persuade an entire trading floor to go no-bid. Traders never

pay much attention to strategists, and are generally much the richer for it.

(Thanks to Kim Benabib for the heads-up)

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