Floor Trader Recalls The Oft-Forgotten Frenzy In The Week After Black Monday

A few days after Black Monday, Greg Bruno was back in the pit, playing witness to a historic futures trade.

A Shearson broker’s large, at-market sell order — “the stupidest order of all times,” allegedly made on behalf of George Soros — turned a $256 Tuesday close into a $200 Wednesday open.

As Bruno remembers it, a Goldman Sachs broker got the order to buy and was making their way across the crowded floor when other traders noticed the interest. Those in close proximity to Shearson jumped to buy first.

“It was a frenzy of all frenzies,” Bruno, a floor trader at the time, said on Benzinga’s PreMarket Prep radio show. “This order ... made millionaires out of multiple floor traders that were trading near that order ... It was an incredible event, and one fellow opened a clearing firm within the next year with the profits he earned on that single trade.”

Fortunately for him, Bruno was on the positive end of an out trade, an error that placed him short the S&P Wednesday morning.

Bruno was short four lot at $500 per contract per handle. The 56-handle move turned his $10,000 or so would-be loser into a $100,000-plus profit.

‘It Was The End Of The World, And I Wanted Cash’

A few days earlier, Bruno had left the floor far less enthused. He describes Black Monday as “surreal” and unexpected.

“It was a day very much like today in Chicago, a beautiful sunny day,” he said. “I remember going out on the sidewalk and looking around at people and thinking, ‘You have no idea what just happened.’ A nuclear bomb just went off in the financial markets, and everybody was oblivious.”

The international markets had triggered a lower U.S. open, which was soon followed by large, successive sell orders that exacerbated a “skittish liquidity situation.”

Today, many attribute the crash to then-nascent computer trading, but Bruno doesn’t consider downtick-accelerating algorithms solely at fault. By his estimation, market stagnation, a lack of liquidity in the S&P 500 pit, set the stage for the record declines that ensued.

“I remember as the day continued, you had brokers that would sell orders that would be looking around in the pit ... and just ask individuals, ‘Is there a bid? Is there a trade?’” he said. “It was as if there were multiple markets trading 10, 20 handles in different areas of the pit, so it was clear that the whole system was breaking down.”

Bruno held no positions going into the day; the week’s volatility had scared most of his peers from keeping anything overnight. So as the markets plummeted, he packed his things and left.

“Personally, at roughly 2 o’clock Chicago time, with the Dow down 300 points, I exited the floor,” he said. “I said, ‘This is it.’ I went to the bank, I took cash out, $25,000 in cash. I said the system is finished, this market is not going to open again. ... It was a very dire situation.”

In the next hour, the Dow fell another 200 points.

A 21st Century Black Monday

Now an investment manager, consultant and certified financial planner, Bruno identifies similar circumstances in the contemporary volatility trade, which entails shorting the volatility index and hedging with long equities positions.

By his assessment, a weeks-long reversal in volatility trends — in other words, a spike in volatility — would force traders to unwind positions, buy the index and sell S&P holdings, which could create a large, liquidity-driven event and set the stage for a crash.

The conditions compound the recent “systematic risk” of allowing equities sales on downticks, which drive volatility through electronic trades.

“The element is there in that trade to create a forced sale situation,” Bruno said. “I don’t believe that there’s liquidity in the marketplace today that existed back then. The trading desks are smaller, the amounts are relatively speaking 10 times bigger in the index, and yet your trading desks have been neutered by government rules restricting the amount of capital that they have available to use, so in a very odd way, even though the markets are much bigger and seemingly more liquid, in my view, they’re not. They’re less liquid than they used to be. So VIX is the area that I see as a potential for a major event that’s driven by forced selling.”

Today, Bruno hedges for such an event by keeping a higher than normal cash position.

“I’m not predicting that a crash event will occur,” he said. “It’s a fat tail, high standard deviation type of situation, but what I think is prudent is a higher cash position than normal in today’s marketplace, simply from a valuation standpoint.”

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