As dawn broke in the financial centers of the United States yesterday, the early returns from world stock markets already were coming in: Down in Tokyo. Down in Hong Kong. Down in Singapore. Down in Frankfurt. Down in London.

In his car pool to Wall Street from his home in Rumson, N.J., James A. Jacobson, a trader for the New York Stock Exchange firm of Benjamin Jacobson & Sons, didn't yet know what had happened in the overseas markets, but the copies of The Wall Street Journal and The New York Times that he was reading as a friend drove told him what was pushing those markets lower. A month after Black Monday took 508 points off the Dow Jones industrial average, congressional and administration officials in Washington still were wrangling over ways to reduce the U.S. budget deficit.

At Lew Mitchell's restaurant near Chicago's financial district, Gary Housman had arrived for his usual breakfast, at 6 a.m. Chicago time. At 7 a.m. Housman had traded his topcoat for the black cotton jacket with the plastic badge that identified him as a floor manager for GNP Commodities on the Chicago Mercantile Exchange, the director of action for his firm in the trading "pits," where GNP handles futures and options trading for clients ranging from the nation's biggest banks to sophisticated individual investors.

Shortly before 9 a.m. EST, Edward F. McGehrin arrived at the Greenbelt branch of the Johnston, Lemon brokerage firm in the corner of a high-rise tower inside the Beltway near Kenilworth Avenue. His travel from home to work was interrupted by a breakfast meeting of the nascent Greenbelt Rotary Club, which he is helping to organize. The talk there was of club business, not the stock market.

McGehrin has about 2,000 active clients, most of them within a few miles of the office, but others are scattered around the Washington area and as far away as Florida -- "clients who used to live here and have moved down there to retire," he said. He said personal contact with the clients is important, and he makes an attempt to get in touch with them regularly even when very little is going on in the market.

The mid-Manhattan offices of Miller Taback Hirsch & Co. -- a small investment firm and brokerage that provides various computer-driven "program trading services" to a variety of money-manager clients -- are removed from Wall Street, and half a continent away from Chicago's trading pits. But it is tied securely to those financial centers by the cords of modern telecommunications. The firm's 12th-floor trading room contains no less than three computer systems that provide traders with continually updated price information about the stock markets in New York and the futures markets in Chicago.

Jacobson, Housman, McGehrin and the traders at Miller Traback Hirsch & Co. represent four power centers on the nation's $2 trillion-dollar-plus securities game board: the New York Stock Exchange, the futures and options markets in Chicago, a local brokerage, where individual investors touch the market, and a firm specializing in complex, costly computerized trading maneuvers for institutional investors.

Yesterday, one month after the market's devastating free fall on Oct. 19, the scars showed plainly. The brimming confidence that was sucked out of the market as it plunged a month ago has not returned. In the words of one trader, "the only people who are really in the market now are the ones who have to do it when they come to work every day."

A look at the market, over the shoulders of the players in New York, Chicago and Greenbelt, showed an uneasy, fitful world where investors of all stripes, from individual pensioners to huge pension funds, are watching and waiting: watching the movement of stock markets in Tokyo and London; waiting for a resolution in the drawn-out struggle in Washington over federal budget reduction; watching for some reason to return in earnest.

In yesterday's market, the computer-generated trading maneuvers that helped push the market down a month ago reappeared in brief bursts, but with a shadow of their customary force. The huge daily trading volume that powered the upward move and the sudden fall was gone, replaced by a more modest -- albeit still fairly busy -- level of trading activity. And investors large and small, burned by the biggest one-day drop ever, moved more cautiously in the various market arenas.

"Everybody is kind of jittery," said Leo Melamed, chairman of the Mercantile Exhcnage's executive committee and father of the financial futures business. He nodded his head toward an array of six video screens stretching across a custom built desk in his Chicago office.

"There is a great deal of uncertainty. ..."

In this kind of atmosphere, with so many potential buyers on the sidelines, small events can cause sharp swings in prices. And it is a market less friendly to riskier ventures, from the costly computerized trading programs to the stock offerings of new, untested companies. It is a market that foreshadows a different kind of economy in the months ahead.

8:20 a.m.

The day's first action was in the currency pit at the Chicago Mercantile Exchange, and the dollar's fluctuations against other major currencies provided the first clues to the markets' course.

Housman, in Chicago, looked for the first action of the day in the Mercantile Exchange's foreign currency pit. In early trading, the Japanese yen, the West German mark and the Swiss franc all showed strength, evidence that world financiers would rather have their money in these currencies than in the U.S. dollar.

But after the opening flurry, the currency pit quieted down, and interest on the Merc's crowded trading floor shifted to the pit where futures contracts are traded based on the Standard & Poor's 500-stock index, one of the most successful and controversial financial innovations pioneered by the Chicago Mercantile Exchange. Trading in S&P 500 futures is linked directly to the stock market, which would open at 9:30 a.m. EST. As the simultaneous opening of futures trading ticked nearer, Housman took up position at the S&P 500 pit.

In New York, Jacobson put on NYSE badge number 2165 and moved onto the floor of the stock exchange, taking his position at Post Number Six, one of several trading centers on the floor at around which traders cluster to buy and sell stocks. The trading posts resemble giant electronic Christmas trees adorned with scores of video monitors flashing green numbers, while inside the post dozens of clerks punch in the orders flows and feed the continuous stream of information.

As a specialist on the floor of the exchange, Jacobson has the right to trade in specific stocks. In return for that right, he is obligated to conduct an orderly market by bringing buyers and sellers together at the best price available and by buying or selling for his own account to add liquidity to the system when necessary.

With the market about to open, he stood within an arm's length of dozens of electronic machines, bouncing prices and orders back and forth with floor brokers seeking information on how his stocks would open. In the frantic one-eighths and one-quarters world on the floor of the stock exchange, where the differences in those tiny fractions can mean millions of dollars, Jacobson is, all at one time, an auctioneer, a mediator and a catalyst in the minute-by-minute world of one-eighths and one-quarters.

9:30 a.m.

The big bell over the floor of the New York Stock Exchange clanged noisily, opening the trading day.

Stocks began trading below Wednesday's closing prices, depressed by the weakness in foreign markets, but Housman observed that the world's trading centers are linked so closely, "We don't know which is leading and which is following at this point."

The partners and employes at Miller Taback were using their computer systems to track relationships between selected stock prices in New York and the related prices of futures contracts in Chicago -- contracts that give investors the right to buy or sell the stocks at a predetermined future date for a price determined when the contract is executed. When a gap -- or as the traders call it, a "spread" -- opens up between prices in Chicago and New York, a computer-assisted trading program issues buy and sell orders in an attempt to profit on the difference.

Because stock prices in New York opened somewhat lower than corresponding futures prices in Chicago, early program trading led to large purchases of stock and simultaneous sales of futures.

"There was an opportunity to do some buy programs in the first 15 minutes," a Miller Taback partner said. The problem was, with volume in both New York and Chicago low and prices in both cities swinging rapidly, excecuting an index arbitrage trading program was "very treacherous," according to one of the firm's traders. Just as the program began, futures or stock prices would swing the other way, wiping out the "spread" on which index arbitrage programs seek to profit.

Traders said the computer-assisted stock buying helped to temporarily prop up stock prices that were under pressure from a number of external forces, particularly worries about the progress of the budget negotiations. "Most of the program activity was pretty much over after maybe the first 20 minutes," Jack Barbanel, a futures trader at Gruntal & Co., a Wall Street brokerage, said in late morning. "From that point on, up to now, the market has really been quiet."

Shortly after the market opened at 9:30, Edward McGherin's son Martin, also a broker in Johnston, Lemon's Greenbelt office, called his father's attention to a block of bank stock that has shown up at a favorable price on the trading screen on his desk, which tracks the action in New York and elsewhere. The elder McGherin had a client who might be interested -- "he's been actively looking at financial stocks" -- and McGherin said he might be able to make a sale. The client, however, was out of town, so McGherin left a phone message and turned back to his screen.

"This is not a 'hustle-hustle' office," McGehrin said. A few minutes later McGehrin called another client, also interested in financial stocks, and ticked off some quotations from his screen, particularly calling attention to one for Maryland Federal Savings & Loan. The client was interested, and he and McGehrin agree to put in a buy order for 1,000 shares at a specific price.

Shortly after 10 McGehrin again checked his computer, noting that "the market is down 14 right now." He called up the Dow Jones news service summary on his screen and asked for the "hot list," which provided him with a quick summary of any news likely to be affecting the market. Much of the news concerned the stymied talks in Congress over the budget deficit.

The Dow summary yielded little, so McGehrin began a series of routine calls. Each day, he has a list of 10 clients to call "just to check in." Reaching one, he said he was "just calling to give you a breakdown of what's happening in the market." As the morning wore on, he continued calling clients, discussing everything from his and the client's health to the condition of the dollar. It was a slow morning.

10 a.m.

The early gains didn't last long. By 10, a round of selling hit both Chicago and New York and the prices drifted down. When the Dow Jones news tape reported at about 10:30 that President Reagan would support a $30 billion deficit reduction plan, the markets rallied a little. The Standard & Poors index of 500 stocks on the New York Stock Exchange reached its high for the day about 11 a.m., buoyed by Reagan's remarks, traders said. But the market could not hold the gains.

On the floor of the stock exchange, the action was relatively slow after the opening, continuing the pattern that has been developing since the wild days immediately following the Oct. 19 nose dive. Peering over his half-glasses, Jacobson said the market's collapse had reduced the order flow considerably. "The shock has slowed down market activity," he said. "It appears that both the Europeans and the Japanese are much less present in the market."

The 42-year-old trader said he had seen "what appears to be a slowdown in the futures activity." And that, in turn, has led to a reduction in index arbitrage activity -- the trading based on narrow spreads between New York and Chicago markets. Overall, said Jacobson, there is a significant reduction in "liquidity," the traders' word for the flow of cash in and out of the market.

The trading volume on the exchange, he said, is now much lower than before. A typical day prior to the market's collapse saw trading of 185 million to 250 million shares. On Black Monday, 604 million shares changed hands on the NYSE, almost double the previous record; the next day, volume was 608 million. Recently, however, volume has moved within a daily range of 145 million to 165 million shares.

11:07 a.m.

The mood at Miller Taback was frenetic. But that partly reflected the high-speed personalities of the firm's traders rather than the level of their program trading. Partners at the firm said that in recent weeks, index arbitrage trading has been relatively quiet.

"There are three things that trigger program trades," a partner explained. "One is portfolio insurance. Another is massive asset reallocation out of stocks and into cash or bonds. And another is just a general speculative buildup.

"We're starting to see some pension funds attempting to sell large amounts of stock -- more than $1 billion worth in some cases -- but that's about the only action. The index arbitrage you're seeing now is just people flitting around. It doesn't have any real impact," the partner said.

What role program trading played in the Oct. 19 collapse is presently under investigation by the panoply of blue-ribbon commissions appointed to study the stock market crisis. Preliminary data suggests that portfolio insurance -- a form of program trading that seeks to use futures contracts to protect against sharp declines in stock prices -- triggered massive stock futures selling in Chicago on Oct. 19. The extent of index arbitrage program trading on Black Monday is less well understood.

Though index arbitrage programs make use of a wide variety of mathematical formulas and several different U.S. financial markets, the most common program -- and the easiest to understand -- involves the Standard & Poor's 500 index future traded on the Chicago Mercantile Exchange and the S&P 500 stocks traded on the New York Stock Exchange.

The S&P 500 index future is a financial instrument that measures investors' perceptions of where stock prices are headed within a fixed period of time. The contract obligates investors to buy or sell underlying stocks, allowing investors to speculate on the overall price movement of the 500 stocks that make up the S&P index.

On the computer screens in the Miller Taback trading room, two numbers critical to S&P 500 index arbitrage blink constantly: the price of the future, which is trading in Chicago; and the price of the underlying stocks, which are trading in New York.

Ordinarily, the numbers correspond closely. At 10 a.m. yesterday, for example, the price of the S&P 500 stocks was 244.43 (the number is a mathematical convenience that represents an actual value of about $125,000.) At the same moment, the computer showed that the price of the S&P 500 future was 245.70.

That difference -- in this case, 1.27 -- is the all-important spread.

On Black Monday, when massive futures selling hit Chicago before stock trading at the NYSE could open, the spread reached an unprecedented 20 points.

Even later in the afternoon that day, the gap fluctuated near 6 and 7 points -- almost unheard of, arbitrageurs said.

Even a narrow spread provides an opportunity for profit. Yesterday morning, if an investor bought the S&P 500 stocks and sold the S&P 500 future at precisely the same moment, he would lock in the spread as a profit -- more than $500 per contract bought.

The partners at Miller Taback were aware of several complications involved, however.

They know, for example, that the gap they see blinking on their computer screens is visible to traders all over Wall Street -- indeed, it is apparent to traders all across the country.

If the gap widens considerably, mass execution of index arbitrage programs may close the price differences very quickly.

The entire process is like putting through the windmill at a miniature golf course. When the price gap opens, one must move quickly through it in order to profit.

Computers make that possible not only by helping to generate the complex mathematical formulas at the heart of most program trading, but also by speeding the execution of trades to the floors of the NYSE and Chicago Merc.

When Miller Taback executes an S&P 500 index arbitrage program, it sends many of its stock trade orders directly to the NYSE floor through DOT, the exchange's multimillion dollar order-entry program.

Speedy and effective execution of trades is a key to successful index arbitrage -- if a trader dawdles or is delayed by technological snafus, the price gap may close before he reaches the markets.

Yesterday morning, the relationship between futures and stock prices shifted quickly -- first the futures would be higher, then the stocks. The flipping injected frenzy into the program trading at Miller Taback, as computer programs were initiated and then pulled off as prices changed.

"The market is rather illiquid," a partner said at 11:07 a.m., talking as rapidly as a Gatling gun." We've had buy programs, sell programs -- the indexes have flipped each way. We've put trades on, we've taken them off. It's been all over the place. I'm a little jammed. Gotta go."

And he was gone.

11:25 a.m.

At times, the stock market is about as gossippy as a neighborhood coffee klatch.

News often is as hot a commodity as stocks, and rumors, sometimes outrageous, are constantly making their way across the floor of the stock exchange and around the futures pits.

It has been said that President Reagan seems to have a heart attack on the floor of the NYSE every couple of months, and stocks immediately begin selling off until the Dow Jones tape carries a denial from the White House.

Attacks in the Persian Gulf and changes in Federal Reserve policy and personnel are other popular rumors.

wood -- Two more weeks," went the headline at 11:26, with a story saying that Sen. Packwood believed it would take that long to come up with a compromise. That soured the market.

"You had a change of sentiment on the negative news out of Washington," a Miller Taback partner said.

12:45 p.m.

The stock market decline picked up speed after noon as investors, concerned about the tenor of news from the budget negotiators, sold their holdings to move to safer ground on the "sidelines," as Wall Streeters say.

The Dow Jones industrial average, down 18 points at noon, was off by 27 at 12:30 and by 38 points at 1 p.m. The decline of other market indicators also accelerated.

Part of the selloff apparently was fueled by six large "sell" program trades that hit the floor together around 12:45. It was rumored that one large institutional money manager was selling futures contracts. That drove the price of the futures about 100 points below the stock prices, setting off the sell programs, traders said.

2:45 p.m.

Checking his computer terminal, McGherin found that the Dow Jones average was down more than 40 points. He picked up the phone and called a customer who recently had bought blocks of shares in five different mutual funds. The customer had told McGehrin that he expects to make a large investment in these funds, but so far had bought only a relatively small amount.

"The thought on my mind," McGehrin said to the customer, "is that this market is off 42 points right now and it might be a good time to do some nibbling."

McGehrin said he has found it beneficial to buy on a down day. He told the customer that mutual funds are priced "at the close," meaning that the customer would get the price set at the end of the day's trading.

"They're squabbling over that deficit problem downtown, and it's pushing the market down," he said. And he suggested that the customer put another $1,000 into each of the five funds in which he already holds positions, telling him that he has to enter the order before 3:45 or it would be priced at tomorrow's close. The customer agreed.

"If I see the market rallying, I'll hold off," McGehrin told him.

3:34 p.m.

"White House says prospects fade for budget accord," read the headline moving across the Dow Jones broad tape. The market, which had been rallying a bit on some program buying, tilted anew.

"It was just one more piece of bad news," said a Miller Taback partner. "People are just sick of reading about this -- it's dominating trading. People are lookingf for some leadership, and they're not getting it."

"The financial markets are certainly signaling that we need some sort of a compromise soon," James Jacobson said as a fresh wave of selling swept the market. His brother, Robert J. Jacobson Jr., who also is a market specialist, said, "I think that when people are anxious and uncertain, it breeds fear. ... And they may not be buying stock on a long-term basis."

An NYSE floor broker who asked not to be quoted by name said, "The people are looking for a definite direction, they're looking for a positive move." He noted that the Dow was off by 41 points and said the market was "showing its anxiety and nervousness."

Another floor broker simply said the news from Washington "put the market into a tailspin."

Still, the dive was nothing like that of Black Monday, for reasons of thinner trading, greater caution, fewer program trading opportunities and a good dose of cynicism.

Having become increasingly skeptical about the chances for a constructive deficit-cutting plan, the markets took the bad news from Washington with something of a weary sigh. By discounting the bad news -- a grand old Wall Street tradition -- the market was able to cut its losses. Wall Street was not going to celebrate the one-month anniversary of Black Monday by staging Black Thursday.

4 p.m.

The final Dow Jones industrial average: down 43.77 points to 1,895.39 -- more than 150 points above Black Monday's close.

The S&P 500 fell 5.51 points to 240.04. Slightly less than 158 million shares changed hands on the NYSE. The Dow Jones news service described the day as one of "sharp losses."

Several of the key stocks traded by James Jacobson and held in his firm's portfolio finished on the minus side.

"We lost a lot of money today," he said, noting that in the course of trading his firm had accumulated more stock for its inventory, but that the value of the inventory had decreased as the prices of the stocks fell.

For the program traders at Miller Taback, the day was somewhat frustrating. "It was so choppy all day," a partner in the firm said after the market's close. "There were significant program trades on both sides of the stock market -- buying and selling. ... There's not much volume, and a lot of short-term speculating about where the budget talks are going to come out. It was a real professional's day."

In Greenbelt, McGehrin was happy to leave the day to the professionals and keep his clients protected. Because of the nature of the Johnston, Lemon branch's clientele and because of McGehrin's philosophy of having his clients diversify their portfolios, the short-term ups and downs of the market remain relatively remote to both the investors and the brokers in the office. "Most of our clients invest for the long run," McGehrin said.

From Gary Housman's post on the floor of the Chicago Mercantile Exchange, it appeared the futures markets were looking for good news but were unable to find it. From his boss Brian Moinieson's office four floors away, it appeared it might be too late for any good news about the budget deficit reduction package.

"They had the opportunity and they lost it," Monieson said. Had the budget negotiators acted quickly after the Oct. 19 stock market collapse, "you would have seen a tremendous resurgence in confidence," he added. "But now they have managed to diffuse the process so much, there might not be any benefit."

The S&P 500 pits remain open for 15 minutes after the stock market closes in New York to give the Chicago traders an additional opportunity to reach the final prices on the stock market.

During that interlude yesterday, stock index futures prices continued to fall, closing down several hundred points -- not an encouraging sign to Monieson, whose firm traded upwards of 40,000 futures and options contracts yesterday.

"It's a pretty good predictor that the market is going to open down tomorrow," he said.

Less than four hours later, trading began again in Tokyo.