Lessons From The Day After The Crash Of 87

Getting off the beaten path, this week marks the 29th anniversary of the stock market Crash of 87. If you were a trader during the Crash, you have a story. I was a self-employed bond trader on the London International Financial Futures Exchange. Here is my story.

In those days, the bonds had a 3-point (96-tick) limit at the CBOT…we had no limit on London International Financial Futures and Exchange (LIFFE). The only thing that would ever spark a limit move was dodgy US Unemployment data. Limit moves did not happen often, but they did happen from time-to-time.

The bonds had been in a bear market for six months. On Black Monday, the DJIA was already down 200 points (9%) going into the final hour of trade. The bond closed unchanged that day at 7725. After hours sessions did not exist, but the cash bond market was still open. After a couple of months of the bonds and the S&P futures trading in tandem with each other, there was a definite disconnect on Black Monday. The S&P’s went down and bonds closed unchanged…something was up.

In the final hour on Wall Street all hell broke loose. When the smoke cleared the DJIA finished down 508 points (22.6%). What historians do not recognize…the previous Wednesday the DJIA was down 100 points (4.2%)…Thursday the Dow was 58 lower (2.7%) and on Friday 108 points (another 4.3%). Over a four day period, Wednesday, Thursday, Friday and Black Monday Wall Street was down over 33%. On Black Monday, while the stock market was collapsing in the final hour of trade, the cash bond rallied 3 full points. On Tuesday, with the bonds locked limit up in Chicago, we traded as high as 8910, or 373 ticks higher than the previous days close. These two days…Black Monday and the following Tuesday is when the phrase, “Flight to Quality” was coined.

Let it be noted, I did not work too hard in those days. I showed up for work in London at 1 pm (7 am Chicago Time) and traded until London’s close at 4:15 pm. I would normally have some sort of boredom position on and sit in the office for another couple of hours trying to get out. When the trade was exited it was time to go out partying. Believe me when I say, London is a great city for partying. I went out almost every night. One must also remember; I arrived in London in 1982 at the age of 26. Not going out meant I might miss something.

So the story goes, my good friend Rick C. a cash bond trader in New York calls me the night of October 19th and tells me to get to work early Tuesday morning. They sold stocks and bought bonds in the final hour of trade. The bond futures will be locked limit in Chicago and all the shorts will have to come to LIFFE to get out.

So bright and early, I am on the LIFFE floor and we open almost 4 full points higher. I immediately buy 20 at 8120 and we are 8127 bid…Goldman Sachs and EF Hutton are the noted buyers. For the next 40-50 minutes the market erodes from a high of 8128 down to a low of 8110. In an hour, I go from a $4,000 winner to a $6,000 loser and I still haven’t gotten out. My thought process takes me to…what the hell am I doing up at this time of the morning…what the hell am I listening to a cash bond broker who once wrote 100 times, “I will not speculate with my own money. I will not speculate with my own money” and hung it on his refrigerator.

During the early morning erosion, Goldman Sachs and EF Hutton are bid for 100 contracts each at every tick. In those days, we never saw 100-lot bids in the bond pit on LIFFE. A 10-20 lot was huge. 200-lot bids at every price were unheard of. I just could not bring myself to hit that kind of bid and take my loss. By the way, EF Hutton went out of business that day.

It was now 8:30 am…I have a 20-lot loser on in the bonds. The Long Gilt (British Bond) is ready to open…I think, let’s just head into the Gilt Pit and scalp the opening. By 9:15 am, the sweat is pouring…I am not sure how much I made, but I knew it was more than enough to make up for the losing bond trade. What did surprise me, after the Gilt gapped open higher, the market barely broke. There was one mini-correction to buy and then it was all one-way traffic higher.

After 45 minutes of scalping, I stepped out of the pit to make sure my count was right. All of a sudden it dawns on me…I still have a bond position. I look up at the boards and the bond is trading 8210. I am long at 8120. With my Gilt scalping and my bond position, I am up almost $20,000. I think to myself, go take half-profits, grab a cup of coffee and a smoke (I was a big smoker in those days…Marlboro Lights).

By 11:00 am, the bond is now trading 8316…I am still long 10 and I am ahead $30,000 on the day. My mates are bugging me to go have lunch…everyone’s had a big day. I take my profits and we’re out of there.

Now one must put this all into perspective. On 9/11 after the planes hit the Twin Towers, the Eurodollars rallied maybe 30-40 ticks and then the Chicago Mercantile Exchange (CME) shut the floor down. The following day, the Eurodollars were another 40-50 ticks higher…so 70-80 ticks higher in a 24-hour period.

On the Tuesday after Black Monday, the Eurodollars were called 100 higher on the floor of the CME, but actually opened 250 better. These were not small numbers we were playing with. There was some real blood spilt. We were in a bear market and there were big-time shorts in the market. There was also some real pain administered in the options pits where volatility traded up to 250%. If you were short puts or calls you lost money. If you could not cover the margin, the clearing house put in market orders and got you out…END OF STORY.

So we return from lunch and the bond is another point higher at 8416. This is now almost 200 ticks higher from Chicago’s close. I had a few drinks at lunch (when in Rome do as the Romans do), it is time to get short. I can barely card up the 10-lot I sold at 8420 and it is 8500 bid. I think to myself, “Okay Tone, you want to sell this, you are short and wrong. Be patient!”  It is now a couple of minutes before the Eurodollars open in Chicago. They are called 100 higher, I sell 10 more bonds at 8510. I am now short 20. The Eurodollars in Chicago open 250 better and the bond does not touch the sides for four points. Nothing trades. We are immediately 8900 bid, 8910 trade. I do a quick calculation in my head…I have gone from a $30,000 winner to a $55,000 loser in 5 minutes and I know I do not have the money.

At that point you think to yourself, “what does a guy do?” I am an American in England. I could leave the country I guess. I could probably borrow the money if need be. I had about $40,000 in my trading account, so I only owe $15,000. What to do? What to do? I figured there was only one thing to do, add to a loser. I sell 20 more bonds at 8910 and think about going for a smoke. I barely have them carded when Salomon Brothers is hitting the 8900 bids, oh my God they are hitting the 8800 bids. Maybe I will make this smoke a quick one.

One must also remember; this was the wildest day of anyone’s career. The staff in charge of keeping an eye on the locals had far too many fires to put out. I was still holding every card, the good sales and the bad sales. And why not? There was no need to get some poor floor manager all bent out of shape over a little old 40-lot bond position. LOL

To make a long smoke short in the next 15-20 minutes, the Eurodollars sold off from 250 ticks higher to only 100 higher and the bonds broke from 8910 down to 8320 (182-tick break)…and I am still short all 40 contracts. My friend Neil Hooper was the Salomon order filler. He gets his count and says just 80 left at 8320, I buy 60. I am now long 20, I know I have just creamed it. I am not sure how much I made, but I can go turn in my trading cards.

Some quick addition here, I was up $30,000, made $110,000 on the shorts from 8910 and another $25,000 on the shorts from 8420 and 8510. I am ahead $165,000 for the day and long 20 contracts at 8320. I am turning in all my trading cards making sure everything is written down properly. Of course, by the time I get the cards time stamped, the bond is rallying and already trading 8500. I am on a roll, time to sell this bounce. I do a quick run back to the pit and sell 40 at 8516. I just made another $35,000 ($200,000 in total) and I am short 20.

To make a long story short and this my good friends is the honest to God truth. The market breaks a point. I cover my shorts at 8416. I am not quite sure how much I made (+$220,000 to be exact), but I knew it was a lot and much more than I ever had made, or had in my life. I left the exchange about 2:30 pm, walked right around the corner to see my friend Trevor. Trevor owned the travel agent. I booked two business class tickets around the world. I was back in the office by 4:00 pm.

If you think this trading day is over for me, think again. Early in my career, I learned about a trade centered on “Market Crashes.” This is a day, price and time trade. The trade HAS to occur over four certain days of the week and on the 4th day the market at an exact time, MUST still be in the direction of the previous three days. All variables must line up perfectly, or the trade is not on. In the past 20 years, I have only seen this trade line up perfectly three times. Once on October 20, 1987, once in 1991 when stocks went into a mini-crash after Iraq’s invasion of Kuwait and another time in 1994-1995 when the Dollar was crashing against the Yen. The two stock trades were massive winners; the Yen trade was a very small loser, but a couple of weeks after the fact, the Yen turned and this trade was a massive five-year winner. The great thing about this trade…an hour after the trade is initialized, if it is not a winner, you stop yourself out; or if it trades below the intraday low you stop yourself out.

So, I am sitting on top of the world in the office in London. There is only one thing to watch, the S&P futures. All the “Market Crash” variables have lined up. The DAYS of the week were perfect, the PRICE on the 4th day was perfect. It was now TIME to make the trade. I bought two SPZ at 187.00. In those days, the S&P contract was twice the size as it is today. Buying two contracts meant a move from 187.00 to 188.00 was a $1,000 move. About 5 minutes after I make the trade, I notice the screen has frozen. No SPZ quotes are coming across the screen…the SPZ is stuck at 185.00. A couple of minutes later I call the floor of the CME. They tell me that the pits have been closed. There are meetings going on in CME headquarters. I am told Wall Street is still trading, keep an eye on the DJIA. They are almost certain that the pits will reopen before the end of trading. One must also remember; just that day they raised the overnight margin on S&P’s to $250,000 per. So, I definitely did not have overnight money.

I haven’t hung up the phone with the CME floor and I notice the Dow begins rallying. In the next two hours it goes from 30 lower on the day to almost 100 higher. I get a phone call from the floor of the CME, they are opening the pits in a couple of minutes…the SPZ is called 30 handles higher. I put in an order to sell 2 SPZ at 217.00. I am filled on the opening and picked up another $30,000 on a two-lot SPZ position in a two-hour period. The total for the day was +$250,000.

I was reminded of this story by one of my clients. He had a colleague that worked in London in the 1980’s. He brought my name up to the gentleman and asked if he had ever heard of me. His reply was semi-flattering I guess. I was well known on the LIFFE for blowing out and having my biggest day ever all in the same afternoon…October 20, 1987. When I retold this story to my client, he was shocked at the huge financial swings considering the position was only 20 contracts and of course adding to a loser meant selling 20 more. My bond position never exceeded 40 contracts. My SPZ position was a 2-lot.



PS. I am forever grateful for the fond memories our industry has given me. Working and living abroad was an incredible education. Traveling truly opened my eyes. I was very fortunate to have the opportunity as a young man.

You know, tax man can take our money. Our ex-wives can take our children. But no one can take the memories. My pit-trading days were the greatest years of our life. As a good mate said, “A trader cannot be made into a trader. A trader is born that way. A trader will pace the floor all night…and love it…and would not change a thing.”

I am a trader and at 60 years old I love what I do each and every day. I am living a life beyond my wildest dreams…AND I WANT MORE!!!

Tony LaPorta

Tony LaPorta Futures Maven

Tony LaPorta has been active in the futures industry for over 36 years including membership at the Chicago Mercantile Exchange (CME) and the London International Financial Futures Exchange (LIFFE). Tony is an ex pit-trader turned screen-trader.

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