Computer-directed trading programs triggered heavy selling of blue-chip stocks today, causing the Dow Jones industrial average to plummet in the final half-hour of trading.
The Dow Jones average plunged 35.68 points to 1768.56, the fourth-largest drop ever on what was the fourth-busiest day in Wall Street history.
The Dow Jones average was up six points until about 2:45 p.m., when the big orders to sell major stocks began to arrive on the floor of the New York Stock Exchange.
But as reports of major sell orders began to circulate, the Dow began to fall, and at about 3:30 p.m. -- when brokers began to place the sell orders -- trading became tumultuous and the Dow dove. At the final bell, when many of the big trades are executed, the average fell its final five points.
In the hectic last 30 minutes of buying and selling on the New York exchange, more than 57 million shares of stock changed hands. That represented nearly 30 percent of the volume all day and was the result of traders unwinding positions they had taken weeks earlier in futures contracts or options that are based on stocks.
Analysts said the big decline in the Dow Jones average reflected the impact of increasingly controversial computer-trading programs and did not signal a turn in the stock market rally that took the Dow up 400 points in four months.
Analysts also noted that more-broadly-based measures of stock market activity gave a far different picture than the Dow Jones average, which represents prices of only 30 stocks. The Value Line index, which measures 1,500 stocks, hit an all-time high. Overall, 1,013 stocks traded on the New York exchange increased in price, while 693 fell.
The price gyrations and heavy volume in today's stock trading was related to what brokers call the "triple-witching hour" that occurred between 3 and 4 p.m. today.
The 4 p.m. close of trading was the final moment for trading in stock index futures, stock index options and individual stock options. The futures and options allow speculators to sell stocks at prices determined weeks or months earlier.
Using powerful computers and buying millions of dollars worth of stock in hundreds of companies, big institutional traders have become a major force in short-term stock market fluctuations. Analysts said there has been a major proliferation of market strategies using options and futures that attempt to improve the yield institutional investors can earn on the funds they manage.
Many Wall Street brokers had warned their clients to stay out of the market late in the day because of the possibility of heavy selling by the program traders.
Some analysts suggested Thursday that the market might have a less active triple-witching hour than in the past. They were wrong.
"It was a traders' market, not an investors' market," said Peter Furniss, the head of stock trading for the big brokerage firm Drexel Burnham Lambert Inc. The jargon "traders market" means one in which stocks are bought and sold not for their underlying value, but because traders try to make money by anticipating the direction in which prices are moving.
Larry Wachtel, a market strategist for Prudential Bache, said that the decline in the Dow index occurred in large part because of the steep rise it had taken during the last week. "The Dow is down because it had been puffed up artificially," he said. "It was distorted by the programs. It was overextended by the programs."
The atmosphere was tense in the trading room at Drexel Burnham as the final hours of trading began. The Dow average had begun to decline as traders anticipated heavy selling by the big investors in trading programs. Once it became clear that the market was moving down, many big investors sold stocks to exacerbate the decline, then bought them back cheap at the closing bell -- when many of the computer-driven programs were closed out.
John Peluso, who directs trading in options based on stocks, closely monitored computer screens all afternoon and watched the markets erupt shortly after 3 p.m.
A Drexel Burnham broker on the floor of the New York Stock Exchange called to warn that program trades in International Business Machines stock were arriving at the specialist's desk. Specialists supervise trading in individual stocks, matching up buy and sell orders. Many of the IBM orders were to sell the stock at the moment the market closed. There were a number of orders to buy IBM at the close, as well, but there was a severe order imbalance as of 3:24 p.m., Peluso's floor broker advised. "There are 309,000 paired and 146,000 for sale," Peluso shouted to his traders. That meant that the specialist had found enough buyers to purchase 309,000 IBM shares when the closing bell sounded, but still was searching for buyers for an additional 146,000 shares.
The imbalance grew in the ensuing minutes, as more and more investors moved to unwind the options or futures contracts positions they had taken weeks or months earlier. Wily traders, aware that the market would continue down as computers directed more and more sell orders, put in their bids on the cheap. IBM lost $1.25 on the day, but those who bought the stock late in the day may be able to reap quick profits if it rebounds next week.
"It's going to be a wild close," Peluso said at 3:45 p.m. Major stocks were beginning to slide, even though other stocks were doing well. The most important futures contract unwinding today was the so-called major markets index traded on the Chicago Mercantile Exchange, known as the "XMI" contract. Of the 20 stocks covered by the contract, 15 are in the Dow index.
"Anybody with Dow-XMI stocks who was having no problems 10 minutes ago will be having one now," Peluso shouted in warning to his traders at 3:53 p.m. By then, the Dow index was declining rapidly. At 3:57 p.m., the index was down 28.7 points on the day.
Three minutes later, at the bell, the matchups of buy and sell orders in major stocks took place, and the index fell again, to close the day down nearly 36 points.