The day is quiet, at first, for 26-year-old Joseph Schmuckler, program trader for Kidder Peabody. The blinking number on his computer screen, which will signal him when it is time to unleash his electronic firepower, is advising him to wait. But suddenly the stock market begins to move downward, and the telltale digit on Schmuckler's screen starts changing like a countdown at Cape Canaveral. The trader and his two assistants erupt in a frenzy of shouted telephone conversations as they advise colleagues in New York City and Chicago to get ready for a blast of trading orders. "Strap on your seat belts, folks," says Schmuckler. "It looks like it's going to be another wild and woolly one! Get ready for Program C! Program C!"
With that, an assistant leaps into the chair at a computer terminal designated for just one important job: to execute Kidder's preset trading program called Firedown. Triggered by a few keystrokes, Firedown zips a massive order to the New York Stock Exchange for the sale of 685,000 shares of stock in 500 different companies for a total of $31.2 million. At the same time, Schmuckler telephones an order to Chicago traders who will buy futures contracts on the stocks he is selling. The simultaneous deals, equivalent to a precomputer blizzard of paper shuffling, take just a few minutes to complete. Schmuckler is pleased. The quick transactions will bring a return several percentage points higher than the interest on a more traditional investment like Treasury bills. "God, this is exciting!" he exclaims. "It's so much fun."
Perhaps too exhilarating, in fact. Program traders like Schmuckler have been accused of sharply accelerating the ups and downs of the stock market and making the rest of Wall Street seasick from the volatility. Computer-driven program trading began quietly enough in the early 1980s, when investment houses started employing advanced software to carry out, in a few minutes' time, complex transactions that previously took hours or days to complete. This gave investors the ability to buy or sell quickly a group of securities as if it were just one stock.
That capability gave rise about three years ago to a particularly canny and complex form of program trading. It is a kind of arbitrage in which traders make lightning transactions to take advantage of fleeting discrepancies in the prices of related financial instruments in different markets. One of the most popular such plays involves the Standard & Poor's 500 index, which rises and falls according to the performance of 500 stocks. A program trader will use a computer's calculating ability to monitor constantly the difference between the level of the S&P index and the price of an S&P 500 index future, a financial instrument that has been traded since 1982 on the Chicago Mercantile Exchange. The stock-index future is basically a contract in which the investor wagers whether the market will go up or down between the moment of purchase and the time when contracts expire, which occurs about every 90 days.