MacKenzie D. An engine, not a camera.. How financial ... - TiERA

The Fall 189meeting. The details of Melamed’s conversation with Phelan are contested,but Melamed inferred that Phelan and his colleagues were contemplatingclosure. Melamed felt he had to act to protect the Merc from the uncontrollablepanic that might ensue if the world’s most important exchange shutdown, and the Merc closed trading in S&P 500 futures (Brady Commission1988, p. III-26; Stewart and Hertzberg 1987, p. 23).Then, at 12:38 P.M., what participants later described as a “miracle” happened(Stewart and Hertzberg 1987, p. 23). Only one index future was stilltrading: the Chicago Board of Trade’s Major Market Index future, its inferiorsubstitute for its desired Dow Jones future, which had been blocked by the legalruling that an index level was private property, not a public fact. One or moremarket participants—their identities are still unknown—had begun to buyMajor Market Index futures. Their purchases were modest, the equivalent ofstock worth no more than $60 million, but in an illiquid market they forcedthe sharpest ever rise in the price of those futures.Later, there was speculation that the purchases were “part of a desperateattempt to boost the Dow and save the markets” (Stewart and Hertzberg 1987,p. 23). If that were so, the choice of instrument was shrewd. Like the otherstock-index futures, Major Market futures had been trading far below theirtheoretical values. Their rapid rise took them to a premium, to prices abovetheoretical values. As the news reached New York, it was a much-needed fillipto morale. Within a few minutes, at around 12:45 P.M., it was followed by someorders to buy stocks, as arbitrageurs began to restart trading to lock in theprofits that the premium offered—despite, as one of them later put it, feeling“terrified of the market” (Stewart and Hertzberg 1987, p. 23). 17 of the MajorMarket Index’s 20 stocks were also in the Dow Jones 30-stock industrialaverage, so the purchases were largely in the stock of corporations whose pricesshaped the publicly most salient market index.As arbitrageurs’ purchases began, the programs, noted in chapter 1, thatcorporations were announcing to buy back their stock also started to haveeffects. Gradually, New York’s specialists received enough “buy” orders toresume trading. Phelan had wanted to keep the New York Stock Exchangeopen. That morning he had received a private appeal from the White Housenot to shut the exchange, and he also feared that closure might be permanent.“If we close it,” he later recalled thinking, “we [will] never open it.” (Stewartand Hertzberg 1987, p. 23)Phelan telephoned Melamed and the heads of other exchanges to say thatNew York would indeed remain open. The Mercantile Exchange then felt confidentenough to restart S&P futures trading just after 1:00 P.M. In New York,IBM resumed trading at 1:26 P.M., and by 2:00 P.M. on Tuesday October 20,