Did you enjoy the 54-point drop in the Dow Jones industrial average last Monday or the 44-point slide on Friday?
Well, maybe they weren't much fun. But investors certainly have enjoyed the as-yet-unexplained 400-point rise that the Dow experienced between January and the middle of this month.
Some traders in Chicago -- where bursts of enthusiastic selling and buying of stock index futures contracts were behind the two big drops last week and the 400-point rise -- say the world had better get accustomed to such volatility. The way the nation's stock index futures markets are behaving these days, volatility is likely to increase rather than decline in the months and years ahead.
That's not very good news, of course, for any investor who thinks the financial markets have been skittish enough these past few years. But if these experts are right, the computerized trading programs that contributed to the stock market crash of 1987 and the mini-crash of October 13, 1989, have yet to leave their worst impression.
Here's the latest problem. In their effort to reduce volatility, the commodity exchanges have raised margin requirements for those buying some stock index futures contracts. Just last week, the Chicago Mercantile Exchange raised the margin requirement for an S&P stock index futures contract -- the most popular of the contracts -- from $20,000 to $21,000.
And while the new margin of $21,000 for people wishing to speculate in the S&P 500 stock index futures isn't nearly as onerous as margins, say, when investors buy regular stocks, the amount of money that has to be put down on this contract is reducing the number of small-time investors who buy these financial instruments.
And as the small investment firms abandon stock index futures, it leaves these markets at the mercy of big brokerage houses that are based in New York.
"Liquidity has vanished," says one small trader at the Chicago Mercantile Exchange, where the S&P index futures contracts trade. "Some of the larger firms can manipulate the market, even though they don't have any intention of doing so."
Not everyone agrees that the larger firms don't intentionally move stock index futures in one direction or the other. One game that is purportedly played is called "inter-market front-running." This means that a big investment firm will purchase an assortment of S&P stocks, knowing that it also plans to purchase S&P stock index futures contracts within a short time. When the stock index contracts are purchased, that automatically will increase the value of the stocks the firm bought.
But let's give the big investment houses the benefit of the doubt. Let's assume that they don't purposely manipulate the market, and deal in this column only with the problem of a lack of liquidity.
What the small traders in Chicago -- who are sometimes referred to as the "locals" -- are saying is that the big investment firms can't help manipulating the markets now that trading activity in both the Chicago futures markets and the New York stock markets has become so quiet. And that is the recipe for increased volatility.
"A lot of locals are staying away from the S&P futures pit," says the trader. "The risk is too high."
Not only do the small, ill-capitalized traders of stock index futures have to put up more of their cash to cover the margin requirements, but the volatility in stock index futures that has resulted from the big boys having so much control over the market has made potential losses on the contracts too unbearable.
The stock market has more than its share of concerns these days, with the nation's economy slowing and interest rates remaining at relatively high levels. But now, it seems, everyone who watches stocks can add one more worry: Small-time investors -- the foot soldiers of the stock index futures markets -- are no longer willing to put up a fight.
Toys R Us and Nintendo are about as close these days as Mario and Luigi. And some folks on Wall Street are getting a little concerned about this fraternal relationship between the retailer and the world's largest electronic game manufacturer.
In recent weeks Wall Street has become a bit dismayed to learn that inventories at Toys R Us are about 10 percent higher than they were a year ago when you compare only stores that are at least one year old, and about 35 percent higher if you include new stores.
The biggest reason for the inventory buildup, according to Toys R Us officials, is the company's desire not to be caught short on Nintendo video game hardware or software.
"We are expecting a lot of business from Nintendo," said Michael Goldstein, chief financial officer of Toys R Us. Toys R Us was caught short on Nintendo products last year, he said, and "we will probably be caught short again." So inventories, said Goldstein, were increased rapidly as part of a strategic plan.
But there is concern that Toys R Us may be miscalculating the effects that an authentic slowdown in the economy will have on toy sales, especially higher priced ones such as Nintendo.