Excerpted from the latest Gartman Letter, and presented without commentary (but with some highlighting).
ON THIS HORRIBLE ANNIVERSARY AND WHAT WE REMEMBER MOST:
Everyone seems to be writing about what they remember about the Crash of ’87 and we remember it well… very… and breaking with our common use of the “royal we” in our commentary and using the personal pronouns instead, from this point onward…what I remember is the sheer irrationality of the day in question; the utter and sheer panic by those who had in the past never panicked and the effect it had upon me.
On the Friday before the “Crash” I was in Raleigh, North Carolina with close friends from my days at the CBOT of several years earlier: Brian O’Doherty, who played football for our beloved NC State University and who traded in the bond pit… and Carl Boraiko… one the best floor traders in T-notes, Bonds and the NOB spread I’ve had the privilege of knowing… and several others. We were there to go to the NC State v. lemson game on Saturday and were playing golf at the Duke University Golf Course on Friday when one of us noticed that the Dow was “Down a hundred!!” that afternoon as we checked our phone pagers that were suddenly paging us all, for there were not Iphones then. The Dow had never been down 100 point before… ever! It was shocking, to say the very least. As a former floor trader and having been writing TGL for three years at the time, and having warned previously about the dangers of “portfolio insurance” I was fearful… very… about what might happen on Monday’s opening as a result.
Going into Monday’s opening, I’d written myself a note to buy KC Value Line Futures and to sell S&P futures in equal dollar sums, knowing/believing that the real selling by the portfolio insurers would be in the S&P futures. Normally I traded only 5-10 “lots” when trading net open positions, however I chose that morning to buy 50 Value Line futures and to sell about 50 of the S&P futures because the “risk” on the spread was obviously less than the risk on outright positions… usually.
The violence of the opening caught everyone wholly off guard and the position moved against me by several thousands of dollars initially but was moving back in my favor quickly by 9:30 a.m. as the NYSE was about to open. However, I got a frenzied phone call from my clearing firm at the time wanting 100% margin on both sides of the trade by 10:00 to be wired to them or they were going to sell me out… immediately! They did not want regular futures spread margins; nor did they want full futures margin on each side; they wanted full 100% payment for the face value of both sides of the trade… in effect about $5 million or so, which of course I did not have. I was sold out… at 10:01 when I phoned to say I could not meet their demand. I lost several thousands of dollars that day… a meaningful sum of money then..
A few hours later as the panic truly began in earnest and as the selling in the S&P futures reached a frenzy, the trade was “worth” several hundred thousand dollars… or would have been worth several hundred thousand dollars… in my favor for what I had expected to happen was in fact happening. The spread between the S&P futures and the Value Line moved violently in the latter’s favor. By Tuesday morning’s panic opening it would have nearly doubled again, but it made no difference to me. I was out!
In retrospect, the clearing firm in question was doing what it needed to do to make certain that its own solvency was assured and in retrospect this was rational.
What did I learn? I learned that markets can indeed be irrational; I learned that one has no choice but to expect the irrational and to prepare for it. I learned that amidst panic anything… absolutely ANYTHING… is possible and I learned to be prepared. Oh, and I learned that I never, ever, EVER want to go through that sort of day again… ever!
