OT: I know I'm not supposed to do this, but . . .
This Heard on the Street column in today's WSJ is just way too interesting....
Heard on the Street
Specialist Firm Is Criticized
For Way It Handled Citicorp
By LINDA SANDLER and PATRICK MCGEEHAN
Staff Reporters of THE WALL STREET JOURNAL
The 7.18% stock-market plunge of 1997 was certainly easier to bear than
the 22.61% crash of 1987. But some money managers are still griping about
the way certain stocks were handled by Big Board specialists this time
around.
And while everyone has a horror story of a late opening or an unwarranted
downturn, few stocks have received more attention than Citicorp, and the
Big Board specialist firm charged with handling trading in the stock, M.J.
Meehan & Co.
"We all look at Citicorp because it's a symbol" of what's happening when
you have "extreme global volatility" in the markets, says William Schneider,
head of listed stock trading at Salomon Brothers. Citicorp, he says, is "the
poster child for global bank stocks."
Amid fears of U.S. banks' exposure to Asian markets and borrowers,
Citicorp fell 13 5/16 to 123 5/16 on Monday, Oct. 27, the day the Dow Jones
Industrial Average fell 554.26 points before all trading was halted on the
New York Stock Exchange.
Looking for guidance the next morning, investors waiting to buy or sell
Citicorp saw the specialist's indications for the opening price veer all over
the map. The first indicated range, posted at about 9:22 a.m. Eastern time
before the market opened, was 105 to 110, indicating an even steeper
decline might be in the offing.
That was the direction for the entire market as the Dow Jones industrials
fell by more than 150 points in the first half hour of trading. Meanwhile, the
Meehan firm was posting a higher range for Citicorp, which it then jacked
up to 121 to 126 as more buyers appeared. The range was then lowered
twice as some buyers evaporated or switched to sell orders. The final
preopening indication was 111 to 113.
By the time Citicorp finally opened at 10:17 a.m., the market was already
turning back up and headed higher fast. Some 645,000 Citicorp shares
traded at 113, more than 10 points lower than Monday's close.
In early trading, the gap between bid and asked prices for Citicorp was as
much as a dollar, more like a speculative little stock than an elite bank issue
with a market value of around $60 billion. Within eight minutes, Citicorp had
shot up by seven points, to 120. By day's end, Citicorp closed at 127 1/2, up
4 3/16 on the day and 14 1/2 points above the opening trade.
Even for a volatile stock such as Citicorp, the quick price spike after the
opening seemed unusual. Specialists are supposed to moderate price swings,
using their capital to buy when others want to sell and selling when others
want to buy. That's the obligation they bear.
For whatever reason, the Citicorp specialist wasn't "providing enough
liquidity" to the market, says Matthew Ruane, a trader at Gerard Klauer
Mattison.
Terence Meehan, chairman of the specialist firm, says the price indications
bounced around because "there was significantly more interest in Citicorp
than usual that morning -- and those interests changed rapidly and
frequently." Indeed, volume in Citicorp's stock was more than double that of
Chase Manhattan.
As for the early price spike in Citicorp, Mr. Meehan says, "The specialist's
role is to cushion prices, not to prevent price movements." And a Meehan
spokesman adds that the Citicorp specialist was "a significant seller into the
rising market." In other words, he did provide liquidity.
In fairness, that Tuesday was a difficult day for all specialists, who ended
Monday with estimated losses of $90 million and didn't know whether the
losses would snowball further when the market opened Tuesday. It might
have been costly to slow Citicorp's rocketing rise, when the whole market
was soaring. The Dow regained 337 points that day, much of it early.
A Citicorp spokesman says, "We're quite pleased with the way our stock
was handled by the specialist in those difficult times." Still, it rankles money
managers when specialists, who can earn a good living in good times thanks
to their potentially lucrative franchise to trade shares, don't step up to the
plate when they're needed in tough times.
Because the price moved up so quickly, those who sold Citicorp at the low
opening price of 113 are aggrieved. So are those who couldn't get orders
filled at the low prices. Some criticize the Citicorp specialist for mispricing
the first trades and then allowing a rocket-like rise.
"I would say NYSE surveillance should be taking a hard look at the [recent]
Citicorp trading, says Junius Peake, an advocate of electronic trading and
Big Board critic who is now a finance professor at the University of
Northern Colorado.
Some expect the Big Board will. "We always review unusual market
activity," an exchange spokesman says.
Indeed, a Big Board probe 10 years ago led to the same Meehan firm
resigning its right to trade Gould after critics complained of mispricing in the
volatile market of late October 1987. Gould opened 45% lower one morning.
Starting to trade at 8, it shot up that day to 15 and closed at 13.
A key part of the specialist's role before trading starts in the morning is to
post a price range that is expected to balance buy and sell orders at the
opening. Usually, says Robert Seijas, a Merrill Lynch specialist, a wide price
range will be indicated, then narrowed before the opening as more
information comes in.
That's what happened with Chase on Tuesday's recovery, Mr. Seijas notes.
By contrast, Citicorp's erratic up-and-down pattern of indications "was
certainly unusual," he says, adding that he doesn't intend to criticize Meehan.
Kent Simons at Neuberger & Berman says he knew when he saw the first
indicated range for Citicorp that if he put in a big order for 500,000 shares at
105, say, it wouldn't be filled. Instead, he figured, the specialist, seeing a bull
materialize, would just raise the indicated range. Mr. Simons says that's just
what happened when another Neuberger money manager did put in a big
order for Citicorp. |
