Red-Blooded Risk: The Secret History of Wall Street

CHAPTER 14

The Secret History of Wall Street: 1988–1992

The stock market crashed on Monday, October 19, 1987, with stocks falling nearly 25 percent. On Tuesday, markets almost didn't open due to credit problems, and then almost failed during the day due to trading volume overload. But through luck and a thousand acts of unsung minor heroism, the financial world did not collapse. On Wednesday, the smoke was still clearing so it was hard to tell what was going on. But by Thursday the financial landscape had changed in dramatic ways. It wasn't just the stock market; the entire financial system had realigned.

Why did nobody but rocket scientists notice? Well, you had to be a quant to see it. The differences looked small without precise quantitative tools to expose them, and they didn't matter in obvious ways for nonquant strategies. For people who didn't expect to understand the market, the changes were no more unusual than a lot of other things they didn't understand. People who think computers and television sets are magic aren't going to be surprised when someone shows them a perpetual motion machine. But physicists know the difference.

Also, you had to be in the markets to see it. I don't mean you needed a job on Wall Street; I mean you had to be actively betting, and in contact with other people who were betting. Fischer Black, a Wall Street quant who did notice, famously said, “Markets look a lot less efficient from the banks of the Hudson than from the banks of the Charles.” ...