seems so sedate. It reminds me of the halcyon days on Wall Street before
the program traders took hold.”^5
Who are these program tradersthat investors hear so much about,
and what do they do? The floor of the New York Stock Exchange has al-
ways been alive with a constant din of people scurrying about deliver-
ing orders and making deals. But in the mid-1980s, just a few years after
index futures were introduced, the background noise was punctuated
every so often by the rat-tat-tat of dozens of automated machines print-
ing hundreds of buy or sell tickets. These orders were almost always
from stock index futures arbitrageurs—that is, program traders who rely
on differences between the prices of stock index futures traded in
Chicago and the prices of the component stocks traded in New York.
The noise signaled that the futures market was moving quickly in
Chicago and stock prices would soon change accordingly in New York.
It was an eerie warning, something akin to the buzz of locusts in biblical
times, portending decimated crops and famine. And famine it might be,
for during the 1980s and early 1990s some of the most vicious declines in
stock prices have been preceded by computers tapping out orders ema-
nating from the futures markets.
In those days, changes in the overall level of stocks did not originate
on Wall Street but on Wacker Drive at the Chicago Mercantile Exchange.
Specialistson the New York Stock Exchange, those dealers assigned to
make and supervise markets in specific stocks, kept their eyes glued on
the futures markets to find out where stocks would be heading. These
dealers learned from experience not to stand in the way of index futures
when they are moving quickly. If they did, they might get caught in an
avalanche of trading such as the one that buried several specialists on Oc-
tober 19, 1987, that fateful day when the Dow crashed nearly 23 percent.BASICS OF THE FUTURES MARKETS
Most investors regard index futures and exchange-traded funds as eso-
teric securities that have little to do with the market in which stocks are
bought and sold. Many investors do very well trading stocks without
any knowledge of these new instruments. But no one can comprehend
the short-run market movements without an understanding of stock
index futures and ETFs.CHAPTER 15 The Rise of Exchange-Traded Funds, Stock Index Futures, and Options 255
(^5) “Flood in Chicago Waters Down Trading on Wall Street,” Wall Street Journal, April 14, 1992, p. C1.
Today the proliferation of electronic trading has made it impossible for an incident such as the one
that crippled the Chicago exchange 15 years ago to happen again.