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T. Rowe Price Traders Saw a Market Turned Upside Down

By Jill Dutt
Washington Post Staff Writer
Sunday, October 19, 1997; Page H01
The Washington Post

NEW YORK—On Oct. 19, 1987, when the stock market went into a free fall and the Dow Jones industrial average dropped 508 points, all Andrew Brooks could do was sit in his usual spot on the trading desk at T. Rowe Price Associates Inc., the Baltimore mutual fund company, and watch the devastation.

"I don't think we sold anything. If we did, it was very small," said Brooks, now chief equity trader for the $81 billion fund complex. "People were afraid to buy, though. There's an adage: you don't want to catch a falling knife."

What Brooks saw as he stared at his computer terminal 10 years ago today was a market in chaos. Nothing in his seven-year trading career -- Brooks was then 31 -- had prepared him for this. Even using his direct phone lines into a dozen brokerage firms, Brooks couldn't get an accurate read on the current price of any stock.

"It was like a motion picture, just watching the tape [the electronic ticker of stock market transactions] as the market cascaded down," added veteran T. Rowe Price portfolio manager Jack Laporte.

It was mid-afternoon of what became known as "Black Monday" when the real deluge of selling occurred. Brooks recalled looking up and seeing people from all over the firm crowded around the trading desk, transfixed by the foot-high, 12-feet wide ticker flashing stock prices on the opposite wall.

"It was like a gallery," Brooks said. "The tone was hushed. People were . . . well, not really in shock, but just standing there trying to make sense of . . . this market being down, at that point, 20 percent."

What Brooks and Laporte and everyone on Wall Street faced that Monday was the unthinkable -- that financial markets might cease to function altogether, shaking the foundation of the global financial system.

"We have in our vaults the stock certificates or the entries [receipts for ownership of shares held elsewhere], so we knew we owned the stock, but it wasn't clear for awhile what the values of those positions were," Laporte said. "If confidence in the structure of the markets had disappeared, it would have had a Draconian effect on values."

All of Wall Street started out Monday morning knowing it could be a tough day. The Dow had dropped 108 points on then-record volume the previous Friday -- the first triple-digit point decline in the history of the average -- and markets in Tokyo and London had dropped sharply in trading Sunday night.

Brooks got in at 6:30 a.m. that morning. His boss already was there.

Following his usual routine, Brooks hit the phones before the New York Stock Exchange opened for trading. But that day, rather than just getting the latest research tips and lists of potential buys and sells, Brooks was looking more for a picture of the trading environment, the "feel" of the market.

"We were asking, 'What do you think? What do you see? What are people doing?' " Brooks recalled. "This was before the days when I would get asked questions. Today, brokers would be asking me about outflows, whether people were selling the funds."

So, they lived through that awful Monday, effectively paralyzed, and then came back Tuesday full of fear about what would happen next.

Steven E. Norwitz, the firm's spokesman, said he came in Tuesday morning and glanced at the firm's stock price in the paper. "Did I miss a two-for-one split?" he recalled joking, as he had spent the whole of Monday answering questions from the media and crafting a statement for customer service representatives to use in talking to nervous clients.

Laporte was nervous himself. He had gone over the stocks he held in the two funds he was managing, trying to identify candidates for sale so he would have enough cash to meet what he feared would be a flood of redemption requests. Amazingly, the flood never came. Redemption requests totaled less than 2 percent over the whole of T. Rowe Price's funds that week, he said.

Laporte also looked for stocks he wanted to buy. One of them was J.P. Morgan & Co., which had dropped $14 Monday.

Brooks put in the order to buy 50,000 JPM at the open. It soon was clear that the chaos of Monday had degenerated into near mayhem. "The spreads [between the price one could sell at and the price one could buy] were unreal," Laporte recalled. "J.P. Morgan had an [opening] indication range of 50 percent."

On a normal day, spreads are quoted in fractions of a dollar and an order to buy or sell stock is executed and confirmed in less than a minute. By the time Brooks learned what had happened to his buy order, JPM had opened trading up $7 a share above Monday night's close and had already plummeted again to 10 percent below the price where Brooks' order had been executed.

Ditto with an order for Minnesota Mining & Manufacturing Co. "I couldn't pull the order," Brooks said, noting that the portfolio manager who had originally wanted the stock had decided he didn't like the wild price swings. "The broker said there were [trading] tickets all over the place. 'Don't worry,' he said. 'You're protected.' "

Brooks realized there was no protection, no order to the market. Things were no better for the stocks listed on what's now called the Nasdaq Stock Market, the electronic market of competing dealers. Critics complained bitterly back then that the over-the-counter traders were simply not answering telephones to execute orders. Brooks said that wasn't the case with the brokers he used, but computer trading screens got locked with inaccurate prices and trading was gridlocked.

"You could have 40 people on a desk trying to cover 60 or 80 direct phone lines," Brooks said. "They couldn't pick up the calls fast enough."

This was a major problem for Laporte, who, just three weeks prior to the crash, had been tapped to take over the New Horizons Fund, which invested in small-company stocks and was one of the firm's oldest and most popular funds. At the end of Monday, the fund's net asset value was down 13 percent. After Tuesday it was down another 9 percent. And unlike the Dow, which rebounded quickly, small stocks just kept falling. By Oct. 28, Laporte's fund was down 31 percent for the quarter.

"We wanted to be buyers Tuesday and we were net buyers," Laporte said. "But we needed to have better information."

Tuesday's market opened up, but then quickly lost ground, in large part because willing buyers such as Laporte and Brooks pulled back after seeing the chaotic results of their buy orders. Again, they were forced to wait for some sense of rationality to return to the markets.

"I breathed a great sigh of relief when the markets closed at their normal time on Tuesday," Laporte said. "The system had weathered the storm. It had bent, but not broken."

On the wall in Brooks's office off the trading floor is an 8-by-10 framed photo of a Quotron stock quote machine, its screen displaying the Oct. 19 price moves for each of the 30 stocks in the Dow average.

"I want to remember what blood in the streets looks like," he said.

© Copyright 1997 The Washington Post Company

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