The Specialists

The Specialists

Way back when we all thought a DOW of 11000 was way too low - that is, about two weeks ago - and the House had just voted down the $700B bailout bill, prompting the Dow Jones index to drop 777 points in one day, an interesting news item made it on to the site:

Specialists' Moves Monday May Have Staved Off Bigger Market Fall

Black Monday could have been even darker.

Proponents of open-outcry trading say that specialist market makers on the New York Stock Exchange, faced with a flood of selling orders late Monday, took the buy side or aggressively solicited for buyers on several large financial companies that were selling off. By assuming the role of buyers or soliciting them, these specialists may have helped limit losses at the bell.

In this solicitation, specialists that represent some financial companies said they would take buy orders in a late crossing session - a move that helped create a floor to some of the selling and kept an even bigger decline from occurring.

"If this was purely electronic, it could have been down 1200 or 1300 on the Dow," said Bernie McSherry, a senior vice president with Cuttone & Co., the largest independent floor operator at the NYSE. via Dow Jones[a] (note: the page is not available on the site any more, here is a screenshot of Google's cache[b], and here's a link to Google's cache[c].)

For a moment you could feel comforted that the financial elite troops were on the barricades and in the trenches, holding off monetary Armageddon. But the numbers didn't support it:

Still, a trader at one leading Wall Street algorithmic firm said the volume of stock handled by the specialists was small compared with the overall listed volume, and may not have had a broad impact.

Overall, specialists executed 141.5 million shares on Monday, more than double the 63.4 million shares they execute on an average day year-to-date. Overall volume was high, however, with about 7.3 billion shares trading on the NYSE Composite, meaning that the specialists handled about 1.9% of the volume. via Dow Jones[d] (note: the page is not available on the site any more, here is a screenshot of Google's cache[e], and here's a link to Google's cache[f].)

Myth or reality? Well, the story came from proponents of open-outcry trading, who could be expected to re-tell stories that glorified their own. In addition, took down the news item.

If I were Penn & Teller, I'd call bullshit on it.

Actually, I call bullshit on it anyway, but in a nice, non-judgmental way. In troubling times, people seek comforting news - for a historical perspective, just remember the Germans being ground up at Stalingrad who swore they could hear von Manstein's artillery and armor coming to their rescue. (See chapter 18, "Der Manstein Kommt!" in Antony Beevor's "Stalingrad"[g].)

So I'm not surprised that The Wall Street Journal[h] was shellshocked enough to print the story as well. So were many other blogs, it might be added.

Only the complete hopelessness of last week stopped more myths to come out - it is hard to claim credit for things not being worse when they have manifestly gone to absolute shit.

2008-10-15, updated 2009-11-28