Amid the celebration of the Chicago Board Options Exchange’s 25th anniversary last week, floated a whiff of fear.
Since the 1987 market crash, U.S. stock prices have soared beyond almost anyone’s expectations. But what happens when the party’s over?
At a panel discussion Friday, securities-industry bigwigs made it clear they’re worried–and not just about business slowing if stock prices plunge.
The threat of a disruptive financial meltdown is real, said Myron Scholes, the 1997 Nobel Prize-winning economist and partner at arbitrage-trading giant Long-Term Capital Management.
Risk-management systems built to handle the workaday stresses of the market’s rise might break down under extreme pressure, he warned.
“How do you handle a crisis?” Scholes asked an audience of several hundred at the CBOE-sponsored symposium. “You’re just sitting there with a sword over your head and you’re gambling that nothing will go wrong.”
Lower regulatory standards overseas are a big worry, said panelist Philip Purcell, chief executive officer at Morgan Stanley Dean Witter & Co.
“It is the global interdependence of what’s been created,” he said. “All of us are nervous at current market levels.”
At heart, an entire generation of investors has grown too accustomed to markets that always seem to pay off, added Kenneth Leibler, CEO of Liberty Financial Cos. “There may not be quite the respect for risk in the marketplace that I would like to see.”
The message: When the market finally cracks, better high-tail it out of the way. It could get bloody.
Profit motive: The London International Financial Futures Exchange is asking members to approve a reorganization plan that could become a blueprint for Chicago’s exchanges down the road.
As part of an effort to promote electronic trading, LIFFE leaders want to disconnect the traditional link between exchange membership and trading rights.
Under the plan, anyone guaranteed by a clearing firm could trade LIFFE contracts over a screen. Unlike today, no so-called permit, the equivalent of a membership seat, would be required.
The primary benefit of membership would become a share in the exchange’s profits, not the exclusive right to trade its contracts.
The switch to a profit objective alone would represent a “huge change,” said LIFFE President Daniel Hodson.
And it’s no secret what’s behind the “huge” doings: LIFFE lost its No. 1 German bund futures contract to the all-electronic Deutsche Bourse last year.
“We’ve had competition,” Hodson acknowledged. “These are governance decisions that flow naturally from large-scale electronic trading.” A vote is slated for May 21.
Symbolic logic: Last week’s launch of futures on the Russian ruble was heavy on symbolism but short on order flow.
Ruble trading at the Chicago Mercantile Exchange was modest, averaging 338 contracts a day in its first week, including just 48 Friday. The options contract didn’t trade at all.
Still, listing the ruble at the Merc is a milestone of sorts, reflecting the domination of American-style capitalism. “It’s a historic moment for us,” Merc President Rick Kilcollin intoned.
The earnest Russian officials on hand for the launch festivities seemed happy to play up the symbolic overtones.
In its willingness to trade rubles, the Merc is a “revolutionary organization,” gushed Alexander Zakharov of the Moscow Interbank Currency Exchange, who gave Merc leaders a gaudy winged-horse statue to emphasize the point.
The only sour note came when the wristwatch alarm of a Merc official went off, playing the first few bars of what sounded like the Looney Tunes cartoon theme– which also could be symbolic.
