How One Trader Won Big While Everyone Else Panicked on Black Monday

the one I'm the most excited about. That. That's the real. That's the real, That's the big one. I think we may have talked about it before, but I'm kind of dreading the next two years and hearing everyone, including many of our colleagues, just endlessly recant war stories about I was there the day this bank, uh you know, went bankrupt and here's the thing I wrote or whatever. It's like,

we're going to have two straight years of that. Joe, I'm gonna love it, and I'm going to force you to sit through an entire Odd Thoughts episode where I just talk about September two tho all the great coverage you did during that time. But besides the movie, Wall Street, And besides the financial crisis, we are at another really important thirty year anniversary, and of course that is the thirty year anniversary of the Black Monday crash in Oh

has it been thirty years already? Can you believe that we are old? We are old? You know? We think in our history is like, Okay, there was this crash, the stock market, um fell a lot in a very short period of time, and then the stock market recovered and then we kind of move on. But I think you would agree that there's a lot of fascinating stuff to unpack from this experience into in terms of what it tells us about how markets work and how traders

work and all that kinds of stuff like that. Oh yeah, people have been drawing lots of parallels to Black Monday recently, um, and I'm sure we can get into that later. But more importantly, I think there's a tendency as we get further and further away from these events to kind of forget about what a big deal they actually were at the time. And Black Monday in particular was huge for

markets and led to um some regulatory reform. But when you contrast it with what happened to two thousand and eight. It kind of seems like there was a fairly quick rebound. Um. But you know, the actual day, the actual event was just huge and full of drama. Not that I was there, but no, but from what from what we understand, I don't recall it either, and not that not too much of us had. I was seven years old the time, but I don't remember it in the news. I mean

I was kind of aware of some stuff. Do you remember it? No, I was even younger. Um, I thought you were going to tell me that you were trading futures at the time, euro dollars or something. I was not. Anyway, I'm very excited about today's episode because we're going to be talking about someone who, unlike us, lived through Black Monday. He was an active trader. He still is active, but he was active during the crash, and he's known for having made crucial trades. Uh. The day after that performed

very well. So I don't think, Um, I think we're going to get a very rare perspective on this event today. This sounds amazing. I want to hear all the anecdotes me too, So without further ado, I want to bring in Blair Hall he was the founder of Hall Trading Company in So just a couple of years before Black Monday. He's still active in proprietary trading. He has a firm called Catcham Trading. He even has his e t F

that's based on his uh, you know, market timing. And he's featured in Black Monday Revisited, an oral history of the crash. It's put together by Richard Dewey. It's running in this month's issue of Bloomberg Markets magazine. It's really awesome, amazing oral history piece also features Peter Borish, Michael Lewis, Jim Chanos Now seemed to leb gotta check it out, so pretty much the perfect person to talk to about this historical episode. Blair Hall, thank you very much for

joining the Odd Lots podcast. Sure, it's good to be with you. Joe tell us, First of all, I'm curious what did you make of our intro. Do you think we characterized, uh, the events of or we basically sort of framed its historical context? Well, and can you tell us what you were doing at that time career wise

and professionally leading up to this big event. Well, at first, I think it isn't an important time First of all, um the eight seven crash was caused by some factors that we now know about, and as a result, we have made some market reforms that I think will reduce um the probability of a catastrophic event in financial markets, and as a result, volatilely will be less in the future.

But it was it was a very crazy time. What happened is the market had gone through some It was down five percent the previous week, and then it was it was down. It was down on Monday, and and everybody knew that would be down again on Tuesday, but we didn't know to what an extent it would be down. And there was an event called um in portfolio insurance, or that there was an activity called portfolio insurance that really exacerbated the crash and caused this extreme movement all

in all in just a couple of days. Whoever, We're gonna dig into all of that. But before we do, what were you doing before? While I was a market maker? Actually I had been a blackjack player before that, I

was a card counter in Las Vegas. I had bought a seat on the Pacific Stock to change and then I had built a firm that had about twenty employers employees that we're making markets in UH index options and futures and stocks, and so we had a presence on most of the major exchanges um in at that time so UH. And one of the things we had is is a screen that would automatically provide option quotes. We were one of the first people to automate the process

of creating quotes for as an options market maker. And I was on the Chicago Board of Options Exchange in the SPX pit which had just been really just been created, so that morning, Tuesday morning, that's where I was at that time with as part of a firm. We had a firm of about twenty people at that time. So from what I remember, options were booming in the nineties, right, and that was partially off the back of the creation

of black shoals or the discovery of black shoals. Can you kind of walk us through what that market looked like, you know, the day before Black Monday or Black Tuesday happened. Well, the Chicago Board of Options Exchange was the largest exchange at that time, although the American Stock Exchange existed along with the Pacific and Philadelphia um so UM we had we were trading calls and puts on the sp a

in a pit an open outcry at that time. Blair, There's so many things that I want to ask you, um, but I feel like I'm going to forget to ask you about this if I don't do it right now. But just briefly, tell us a little bit about the skill overlap between going from being a black jack card counter to a stock trader. We talk about gambling a lot in various ways on this podcast, but I'd love to hear it from your perspective. What specifically is the

skill set that sort of transcends both things. Well, there are two skills really. One is dealing with risk and capital fluctuations. That's one skill, and then the second skill is dealing working with the team. I was part of a team playing black jack in Las Vegas, and so um both of those skills. First of all, the capital fluctuations. Even though you have an advantage in any kind of a game or a marketplace, you will have capital fluctuations

and capital draw downs. You will go through bad periods, But you have to understand that you do have an edge in the long run and have faith in that, and you have to be able to withstand those losses and stay in there and keep operating, operating in a rational and objective way throughout that time. So it's emotional. Uh, it's it's really Uh. Learning to deal with your emotions

is part of it. And the other part is that you need to be able to work with other people in a collaborative way, and that skill, of course is very important also. And is this so that in the context of blackjack, so that the casinos don't recognize you as a card counter being recognized as another issue completely from Uh. No, No, that that wouldn't be. It's it's just in terms of um, just working on a team. UM,

people that do significant things collaborate with others. So Joe always brings it back to either gambling or chess usually, Uh, just to stick to the theme. I mean there there is a link between UM gambling in Vegas, say, and Black Shoals and Black Monday, right like people talk about the Kelly criterion and Ed Thorpe and Martin Shoals. Can you kind of square that for us or give us the background? I always say it's getting an edge and

staying in the game. Staying in the game is knowing how much money to put on the table at any one time, and if you lose half your bank roll or half your trading account, you must reduce your size of your positions by half uh and so that relates to the Kelly criteria. Knowing how much too um capital to put at risk at any one time and being able to adjust that as your capital either increases or decreases.

Let's go back to the events of Black Monday. So one thing I realized we didn't say is that how bad Black Monday was if for people not familiar with that, the Dow fell over in one day absolutely points famously, which you know, these days may not be that much or kind of you know, a volatile day, but just an absolutely extraordinary one day sell off, the likes of which financial markets had really not seen before on such a grand scale. There's also crashes all around the world.

But let's go to that Tuesday. So walk us through the event. Obviously everybody completely fried or stunned by the events of the day before. Tell us about how you were thinking going into the markets that Tuesday morning and how people were behaving. But we had screens that actually displayed our prices in the SPX pit at the Chicago Board of Options extrains, and so these were prices that you allegedly to trade on, and in today's market you

can trade on them. In those days, they were representative quotes, and so we give gave our best estimate of where volatility was. And I don't have the exact numbers here, but I think we were seen that volatily would have risen from something like twenty to forty. But when implied volatively opened at sixty, it was as a mark. As the lead market maker in the SPX pit, we were essentially run over by orders. We could not respond fast enough to these, uh move our markets fast enough to

even stay somewhat in the game. Uh. It was an extremely stressful time where everybody was fighting to get any kind of protection they could. On the downside, so an open alcry pit, people are physically trading, right you're were you doing the hand signals and all of that? Oh it's voice and hand signals, yes both. So what was the atmosphere like then on that day When there's an extreme move either way? Uh, there is usually and there was at that time a Uh, there were a lot

of people in the pits. And when I alluded to I think earlier we talked about how later in the week, as actually people were so scared and the FED had increased capital requirements, we actually had there were fewer people in the pits later in the week, but that morning it was extremely chaotic and nobody knew what was going to happen. So what did markets do in the early

hours of that Tuesday? And then what did you do in particular to sort of, you know, take a spot an opportunity in the cast and why did you sense that there was an opportunity. Then what happened is in the market actually rallied Tuesday morning, but then it continued to sell off, and we suspect that was because of the portfolio insurance orders that had not been executed from

the previous day. So the market UM had a steady decline UM at that time, we UH the Chicago Board of Trade had a contract called the Major Market Index, and we were one of the one of the larger market makers trading across index products, so we had UM.

We had positions in the New York Stock Exchange Index on the n y A, and we had a position in the the o e X and the sp X. At the in the SPX, and we also had a position in the Major Market Injects at the Board of Trade, which was a mirror of the Dow average, so it was included twenty stocks twenty large stocks. We had positions all across the board and had to keep track of whether we were we were trying to stay neutral relative

to the marketplace. But the reason that I had to go over to the Major Market index was that, um there were no brokers in the pit that could execute our orders because the murk, the Chicago Merchantil and the Board of Trade had said you must have at least a hundred thousand dollars in your account as a broker to execute orders for other people, and as a result, many brokers were excluded from participating, and there was no

broker outside broker that could trade for us. Normally we went through a broker in that pit, but I happened to have the full Board of Trade seat, and so I could go over and personally trade. So, even though I was the head of the firm at that time and would not normally be doing at trading in one of those futures bit pits, I did go. I did walk across the street from the cbo E to the

border trade. You jumped in. But this is this is what I want to ask, because in the two thousand eight financial crisis, one of the accusations thrown at some of the big market makers was that they just stopped picking up their phone um and taking orders. Was there any of that? On Black Tuesday? I realized some people couldn't trade because they didn't have enough capital. But did anyone just kind of throw their hands up and walk

away and say this is too much? Yes? Essentially, the specialists in New York, we're not picking up the phone. In Chicago, there was a pit, So there were those people that were there, and some of them would be quiet and others would open their mouth. Uh. In fact, one of the one of the things I actually learned from a colleague over the Chicago Board of Options Exchange

by the name of John Stafford. We had traded together, and one of the things that he did is he he said that when somebody comes in with an order, you always respond to them, even if you can figure out what the price should be, because these are complicated options trades and future trades. But do you always respond to them it maybe with a ridiculous price with an

extremely wide market, but you always respond. So I was in the mode of always responding to which sometimes can get you into trouble, but in this case to work to buy advantage. Fill in the details there in terms of how it worked to your advantage. You you had this opportunity of essentially being the only person in this position that you were in. How did things then, uh sort of settle out for you in the days and

weeks ahead? Well that first of all, the key was that morning when the market continued to decline, and of course it looked like it was never going to end. And so what what I did was that I was in the major market um kids, and I had been a small buyer trying to reduce our short position. So I was buying five small lots of twos and threes and fours and fives to to try to reduce our position. But there was a rumor that they were going to halt trading on the Chicago and Chicago mercantile in the

futures contract that was the big contract. And so if they halt at that, I was fearful that they would halt for a couple of days. Even so I actually sent I actually asked somebody from the firm to go over to the library and do research to determine what happens on trading halts. Now, this was a completely ridiculous request because we obviously didn't have time. We only had about twenty people in the firm. We didn't have time to send somebody over the library in those days, and

we didn't have Google. I had a sense that if they were going to halt trading, that this was a buying opportunity, because uh, the panic had gone too far, and so I told told the firm to be long on the halt um. So we were acquiring a position and all at this time. Well, it ends up that um Drexel Burnham, of course, a firm that doesn't longer exist, has had a seller who was selling his position, and they needed to sell this position. I guess the clients that we need to sell it. They knew that it

was a very orderly pit. And one of the things that happened was that Pat Harbor, who was Chairman of the Board of Trade at that time, did not get enough credit for actually keeping that market open the entire time. And it was a very orderly market with about old no more than twenty participants, but I wish he had. He should have gotten more credit for not panicking and

closing the markets. So as things started to decline, Drexel Burnham had a big order to sell, and knowing that I was I had been probably the only buyer in the in the pit, consistent buyer. UH. They said where were you buy a hundred? And I gave him a ridiculous price, and they said you own him. I was scared to death, had a big of my throat, and UH immediately told the firm that we were a long A hundred contracts was an extremely large trade. UM. And I think that one of the things is the market

was trading extremely wide increments. UH. It had normally traded in five and ten cent increments, so it was trading about two ninety It would have been two ninety and five cents at ten cents. In this case, it was two ninety at two ninety five, and there was a h There were bids at two ninety. He actually because it was a large contract, he said, I'll tell him at two eighty five. So I bought these contracts at two eight five trades to eighty seven, trades to eighty

eight and he says, then I'll sell you. Then the fifty at the five. I bought them and considered. I considered sharing some of those contracts with the rest of the pit. And by the time I didn't think it happened, it was trading. It was two ninety bid, it was bid, and later in the day I think it finished somewhere in the three sixties, three sixty three, seventy. So it seems so simple in retrospect that you kind of stayed calm and started buying when other people were really panicking

and selling. What was it that you saw that other people like drex Sol didn't or what was it about your position that allowed you to do that but prevented them from doing a similar thing. Well, I was providing liquidity, so they were. They were forcing the market. I did have a sense. I did know that. Um I didn't know, but I had a sense that a trading halt provided

an opportunity. So that was the reason that I provide liquidity on that side especially, And it was also in conjunction with the fact that the the FEDS had had had raised margins, so we then also had to reduce positions. So I was in the right place at the right time with some sense that this was this was an opportunity. So we have to just about wrap it up here. But I have one very quick question, one slightly longer question.

The first question is can you tell us you know how much in the end your firm made from the trade. But more importantly, as we look at the market now and people worry about whether we see things like the echoes of portfolio insurance re emerging and other sort of volatility products and so forth, what do you think are the key things to understand about the vulnerabilities of market structure today. Well, I think in retrospect, I actually do Mark.

I do know Mark Rubinstein, who was really the creator of portfolio insurance, And actually I have a house in California, and he was at a party at my house after the crash, must have been early November, and he was so sad. He was distraught. He said I caused the crash. Later, even though it wasn't well known at that time, it was in fact true that the crash was exacerbated by portfolio insurance, which now today with the look quidity that is in the market, is probably a very viable product.

He was distraught, He's a very honorable man, and he along with us Heine Leland and John O'Brien, they were the founders of portfolio insurance. But now with the circuit breakers and the tremendous liquidity is provided by by proprietary traders, I think portfolio insurance now is a viable product where it wasn't at that time. So it's just two ahead of the time, Blair, Can I just press this issue, um, because a number of people have brought up parallels to

portfolio insurance. So for instance, UM, the risk parity strategies that kind of assume a relationship between bonds and equities, various types of programmatic trading, sometimes even volatility trading. Do you see any parallels between you know, a potential black Monday, Black twos a situation and some of those more modern strategies. I haven't thought about this, uh to a large extent,

but I don't think there's UH. I mean, at that time this was a tremendous There was a tremendous amount of money in this strategy relative to the liquidity that could have been provided. I think they're more diverse strategies now. Risk parity is can be adjusted over UM periods of time that have to do with the volatility of each instrument, and so as a result, those adjustments occurred on a

on a more gradual basis. Um, I don't see one strategy that is overwhelming the others, and so with the circuit breakers that we have in place, I think that's a and the market structure has caused really this, this decline in volatility were the historic lows and volatility. I find it interesting the press that says that we're in crazy times. We're not. We're in a very stable times from a volatili standpoint, or at this point in time, from our perspective in the press, we might even say

it's too stable. We need more interesting stories. Blair Hall is fascinating to talk to, great to get your perspective. Love hearing the stories of you know, there's a sort of different ear of trading. Really appreciate you coming up my pleasure, so, Tracy, I love hearing about sort of different eras of trading and what it was like. And so obviously crashes and huge crashes can happen at any time and they'll they'll be big ones again in our future.

But thinking about things like being the only person physically in the room or having to go to the library and look up how the rules of the trading hall could feartically affect market that's distinct to a certain time, and it's sort of like, you know, I find it very interesting. Yeah. Um, I thought it was really sad that that little bit um that anecdote about Mark Rubinstein going to the party and saying that he caused the crash, because of course, the whole idea about portfolio insurance was

that you protect yourself in times of crash. Um, so poor guy. Kind of Um. You know, one thought that struck me. Some things are the same when it comes to trading, like the notion of some market makers just panicking and not picking up their phones. That happened, you know, in two thousand eight. But I wonder if there's one thing that's different now, and that's the sort of regulation

and legal aspect of everything. Like I just wonder, if you really had the market falling apart, how many compliance people are you going to have descending on your market making or maybe even trading um units or teams telling you that you can't in all honesty do anything because you just don't know what's going on, and you have a whatever, an obligation to your shareholders or clients. I just wonder if that's the thing that's going to change

this time around. Yeah, and it's really interesting that lesson, that's our trading lesson here are late about you know, if you don't know what to do, don't say you don't know what to do, don't not answer the phone, just go out there with a ridiculous quote. So just in other words, give yourself a huge margin of error to be wrong. And if the client, if the person on the other end of the trade doesn't want to take it because they think that's a ridiculous quote, then okay,

they don't have to. But if they do take it, then you give yourself the opportunity to make a you know, you put the choice back on them, but you give yourself an opportunity to potentially make a lot of money. Just seems like one of those interesting ideas about how in a period of extreme volatility or extreme move you can sort of protect yourself in that way, continue your obligation as a trader, as a market maker, but give yourself,

you know, that cushion. But again, you have to have a lot of autonomy and a lot of confidence to do that, and I wonder if that's kind of what's lacking in modern finance. I guess we'll find out the next time we have a flash crash or uh, black Friday or Black Monday or Black Tuesday or black any day of the week type event, and there will definitely be those days and hopefully we're still doing our podcast by the time the next one time, so we can

talk about it. Yeah, and we'll actually be there and we'll have war stories of our own to tell exactly. This has been another episode of the Odd Lodds Podcast. I'm Joe wi Isn't though. You can follow me on Twitter at the Stalwart, and I'm Tracy Alloway. I'm on Twitter at Tracy Alloway. And you can follow our producer Sarah Patterson on Twitter at Sarah pett With two teas. Thanks for listening to