What dazed young brokers can learn from the ‘grey hairs’
Plenty of investors took a hit when share markets crashed globally in 1987, but an even greater pain was felt in that big casino known as the Sydney Futures Exchange
WHEN FUTURES WERE BURNT
- By Hamish Fraser. First published October 21, 1987
The real losses, the losses which will bring in the bailiffs before Christmas, happened yesterday – not in the much-photographed and televised arena of the stock exchange floors of Bond St in Sydney and Collins St in Melbourne, but in O’Connell St, a quiet, diagonal tributary to Sydney’s financial mainstream, Pitt St.
Number 13 O’Connell St is the home of Australia’s only leveraged market and, by some people’s definition, biggest casino, the Sydney Futures Exchange.
Sure, there are thousands of Australian investors who were battered by yesterday’s collapse in share prices, but at least they have the consolation of owning scrip, the certificates that testify they are shareholders in companies which make profits and pay dividends and may one day again, please God, rise in price.
Futures traders have no such hope. Theirs is an all-or-nothing bet.
A senior partner of a leading stockbroker took such a bet on Monday afternoon. A sober and experienced practitioner in the securities industry, he took the view that Monday’s fall was overdone, an opinion that was underscored by the share price index (SPI) on the futures market which after a day-long free-fall appeared to be bouncing back.
The SPI is a notional basket of shares, based on the all ordinaries index, valued, at Monday’s index level, at $200,000.
He placed an order for two SPI contracts when the index stood at 2006. In terms of Sydney Futures Exchange regulations, he was obliged to put up a deposit of $8000 per contract, an outlay of $16,000.
By 9.30 yesterday morning, half an hour before the share market opened, his futures broker was on the phone to say the market had fallen overnight and the index was expected to open at 1400. As the futures broker would be obliged to settle with the Futures Exchange at noon, would the client kindly deposit the difference – a loss of $50,000 per contract – before noon to keep the contract alive.
As it happens, the SPI opened at 150 and fell steadily through the day. The Sydney broker, recognising that “first loss is best loss” instructed his futures trader to close out as early as possible and was left with a loss of $129,000.
Our business correspondent in New York, where the sharemarket crash began, reported on the backlash against years of excess
YUPPIE HORROR ON WALL STREET
- By Janine Perrett. First published on October 21, 1987
Jokes about yuppie stockbrokers trading their BMWs for McDonald’s uniforms abounded on Wall St yesterday as the young Turks watched their futures crash with the Dow Jones.
“What do you call a yuppie arbitrageur?” Answer: “A waiter”, joked The Wall Street Journal. Behind the feeble attempts at levity were genuine horror stories of young brokers losing their shirts and other people’s money in their first crash course in collapsing markets.
It was only a few months ago that American business schools began considering running special training courses in bear markets for the financial community’s new generation.
Concern had been mounting that this generation, often disparagingly referred to as “the beardless youths”, had never experienced anything other than a stockmarket boom. It has been an unprecedented five years of soaring share prices, fast profits, escalating salaries, rapid promotions, awesome responsibilities.
Such was the euphoria in the roaring Reagan ’80s that the new recruits did not even need to learn about such things as client relationships. A phone, a computer terminal and a quick mouth were all that was needed to succeed in the new-look investment community.
Innovations in technology and market products outpaced staff turnover. Young futures operators often boasted they were dealing in products they did not fully understand.
As profits of the financial houses swelled, so did the bank accounts of young stars, giving rise to the now infamous yuppie syndrome: the tales of six-figure salaries, red BMWs, $1000 suits.
Few brokers in New York would be spotted without a Rolex watch on heavily tanned arms. One 27-year-old investment banker in New York told journalists his yacht was a metre longer than his chairman’s. Other brokers under 30 would often throw temper tantrums if their end-of-year bonus was not considerably more than their already inflated salary.
As the youth cult became an obsession, the elder, wiser members of the financial community were pushed aside in favour of the new hot shots. Within yuppie circles, anyone over 40 was termed a “grey hair”. Even market luminaries such as Henry Kaufman found it difficult to peddle the Dr Doom mentality in recent heady months.
Monday Massacre has changed all that.
Suddenly panicking investors wanted to hear from the “grey hairs”. The only thing to be heard from dazed young brokers was wails of dismay.
While the market may recover from the shakeout, it is not certain yuppies will be so lucky.
During a recent rout in the futures market, young traders could be heard in the men’s bathrooms regurgitating their lunches. It only added to concern that perhaps they might not be able to handle any serious downturn.
Australian brokers and bankers have also fallen victim to the yuppie trend, as the sheer demand for workers led to the recruitment of people with few qualifications. Flipping hamburgers at McDonald’s may not be their first career choice.
DOLLAR RIDES THE ROLLERCOASTER, BUT THE BUCK STOPS WHERE?
- By David Potts. First published December 12, 1983
How thoughtful of the government to float the dollar 12 shopping days before Christmas, opening such a new range of possibilities of presents.
With the dollar whizzing up and down, a personal computer with some market intelligence programmed into it becomes an essential accompaniment for the colour television.
For that overseas holiday, now you’ll need to know what the dollar is doing, and how long it intends to continue doing it.
After all, you wouldn’t want to flit off to Fiji reasonably well off one moment, only to find you can’t afford the departure tax to return. Or worse still, the taxi fare from the airport having got back.
To protect yourself against these market forces which have been let loose you could always hedge your dollars in the futures market, though that costs money. (The need for a personal computer, I am sure, is becoming more convincing as you read this).
But look on the bright side. You could well return richer than you left. If you crossed the International Date Line you’d be better off still. Not because you’d get tomorrow’s value of the dollar yesterday, or vice versa if you’re going the other way, but because you could arrive at your destination before you left, as well as having more money.
Seriously, though, your trip overseas probably won’t be affected much. One of the peculiarities of the “crawling peg” system of setting the exchange rate was that we were often up and running when we were supposed to be crawling.
A floating exchange rate might be volatile, and even that remains to be seen, but it doesn’t move by 17.5, 10 or even 5 per cent overnight, as can happen with a devaluation or a revaluation. Though the authorities can be flat-footed in moving the exchange rate, and then often in the wrong direction, the dollar did vary day to day against other currencies.
It will continue to change. The changes might, but not necessarily, be more frequent. Certainly when the UK floated the pound more than four years ago, your ordinary Briton didn’t notice any difference. There was, however, one odd side-effect. Deregulation of the exchange rate brought a boom in the property market, but don’t ask me why.