Introduction to ‘Bull Market: The rise and eclipse of Australian stock exchanges’

chalkies

Australia’s stockbrokers showered anxiously and shaved with unsteady hands as they prepared for work on Tuesday 20th October 1987. News was filtering through that Wall Street, fifteen  hours behind the Australian East Coast, had just closed after a  devastating day of losses, far worse than the 1929 stock market crash  that led to the world wide Great Depression and which had seen grown men  in despair leaping off buildings to their death.

The New York Stock Exchange, at number 11  Wall Street, which commonly sets the tone for Australian trading, saw  its primary market indicator, the Dow Jones Industrial Average index,  nosedive by 508 points, a plunge of 23 per cent, compared with a  then-mightily disturbing fall of 13 per cent on the first day of the  1929 meltdown.

Now the tsunami of panic that had already  engulfed London, Tokyo and Hong Kong, was heading for Australia.  London’s benchmark FTSE (Financial Times Stock Exchange) 100 index had  shed 10 per cent; Tokyo’s Nikkei 15 per cent; and the Hong Kong stock  exchange lost 11 per cent and promptly shut itself down for a week.

Melbourne share trader Jock O’Connor was  in the middle of an early morning tennis lesson when a friend bailed him  up. ‘Did you hear New York collapsed last night?’

‘I couldn’t believe it’ he said later. ‘Everyone was in shock because of the enormity of it’.

If they did not hear the gloomy news from  colleagues, they got it from the morning newspaper editions they read  on their commute into the city. ‘Black Monday Crash’ screamed the front  page headline in The Australian. ‘Panic sell-off grips New York’ and  ‘London plunge biggest ever’, where, reporters said, ‘nothing could be  done to halt the carnage’. The usually sedate and restrained the  Australian Financial Review’s front-page banner headline shouted: ‘World  Markets Collapse’.  Yet the  late night Monday print deadlines meant that the newspaper did not,  literally, know the half of it. The AFR reported that ‘the Dow Jones  Industrials index crashed more than 200 points in the first two hours of  trading’ and it missed the afternoon’s larger collapse, which was now  being reported on radio and breakfast television news. There were  parallel reports of near-hysteria in New York where blue chip stocks,  along with almost everything else, plummeted as shares were sold  mercilessly.

Yet there were optimists about, who would  later be seen to have been clutching at straws, hoping this was to be a  ‘correction’ not a full blown bear market. ‘Recovery is possible’ wrote  veteran AFR scribbler Albert Smith, while the newspaper’s back page  sage ‘Chanticleer’ wrote ‘that expectations late yesterday (Monday) were  that [Wall Street] would recover some of its lost ground.’

Nonetheless, the question in everyone’s  mind in the leafy suburban stock broker belts of Australia’s major  cities early that Tuesday morning was not ‘Will the Australian Market  fall?’ but ‘By how much?’

It was soon to be revealed in dramatic  fashion on the nation’s stock exchanges’ trading floors that were still  then in operation.  It was to be their last major dramatic play, however.

In Sydney, a quarter of hour before  trading opened at 10 o’clock, the large blackboards above and around the  trading floor were already stacked with sell orders with no buy price  to be seen.

Gavin Larkin, a novice ‘chalkie’ in  Sydney – one of the young men who used to record latest bids and offers  prices for shares on the blackboards in response to shouts from traders  milling about below – recalled that adrenaline was pumping before  trading started. The market opened in chaos.

‘When the bell rang, it was a cacophony of yelling’, he recalled.

With newly-installed computer systems  being trialled to handled just the top 20 stocks struggling to keep up  with the waves of panic selling of shares, twenty minutes after stock  exchanges opened the All Ordinaries Index had shed more than 14 per cent  of its value, after 30 minutes it had fallen 16 per cent and after 45  minutes it was down 440 points or 21 per cent – the level at which it  ended the morning session.

This wiped a massive $44 billion – $101  billion in 2015 dollars – from the market capitalisation of listed  Australian stocks, which was enough at the time to buy Australia’s  largest company BHP almost three times over.

Some people coped with the pressure  better than others. In the mid-morning mayhem, one of Larkin’s  colleagues dumped his chalk and eraser, left the building and never came  back.

‘He was a real mover and shaker, he had  just been dropping everything he earned into the market,’ Larkin  recalled. ‘He turned around and said “I don’t give a shit. I just lost  $250,000”’.

The greatest damage was done in the forty  five minutes after the 10 o’clock opening as investors scrambled to  sell high profile stocks, including hitherto high flying darlings of the  market dominated by the some of the country’s most influential  businessmen, such as John Elliott’s conglomerate Elders IXL, Peter  Abeles’ transport behemoth TNT, Rupert Murdoch’s News Corporation, Bruce  Judge’s disparate investment vehicle Ariadne, George Herscu’s property  and retail business Hooker Corporation, Larry Adler’s insurance firm  FAI, Fletcher Challenge and Robert Holmes à Court ’s Bell Group.  This  collection of shares lost an average of a third of their value, with  TNT losing almost half. This was to be a turning point from which almost  all these entrepreneurs never recovered. They had grown rich on the  back of easy lending by foreign banks looking to get a foothold in the  deregulating Australia in the early 1980s. Some overstepped the mark and  eventually fell foul of the law for various corporate transgressions.  Only Murdoch subsequently flourished.

Even the genuine blue chips, those solid,  unflashy companies running generally tight operations took a big hit,  including the major banks, which on average shed almost one fifth of  their value. BHP slid 41 per cent; building materials supplier Boral  fell a mind-boggling 60 per cent; and the well-led clothing and rubber  goods maker Pacific Dunlop was down an equally astounding 44 per cent.  For anything of lesser quality there were often no buyers at all.  Veteran broker Bill ‘Captain’ Edwards said: ‘There were just no buyers  for the crap stocks.’

The top thirty six stocks then accounted  for 55 per cent of the All Ordinaries index. Because they were large and  liquid, they took the brunt of the selling. Volumes were massive. The  turnover in Bougainville Copper and TNT were six times higher than their  average volumes; Pacific Dunlop and ANZ Bank were up well over five  times; and the unfortunate Boral saw its volume ramp up by factor of  four and a half. The most active stock by value was BHP, which saw $88.2  million ($202.9 million in today’s dollars) worth of shares change  hands.

Around 300 people packed the public  gallery overlooking the Melbourne trading floor, while they were  standing twenty deep in Sydney’s gallery, anxious for a peek at history,  bleak though it was, being made. Crowds gathered outside to stare in  disbelief as the electronic price and index tickers silently reflected  the turmoil inside the exchanges. In Sydney, those looking in from the  street had to put with a persistent drizzle.

As the morning wore on television news  programmes made live crosses to exchanges around the country,  shell-shocked market commentators found coherent response difficult when  asked for their views. Don Stammer, a respected economist with Sydney  stockbrokers Bain and Co said: ‘In this market you don’t need to be an  investment analyst, you need to be a clinical psychologist’. Afternoon  newspapers rushed onto the streets with headlines such as the Melbourne  Herald’s ‘The Crash of 1987’.

After the rough and tumble morning, with  chalkies clambering over each other to write their prices up in the  correct spot amid a typhoon of noise from shouting traders, Larkin and  his remaining colleagues retreated to the pub. ‘We felt we’d earned it –  everyone was just dazed and confused,’ he said.

There was, however, to be no respite in  the afternoon session and the market eventually closed down 25 per cent,  taking the day’s accumulated losses to $55 billion – $127 billion in  2015 money. Australia had another record, albeit that this one was  unwelcome. No other major market had suffered such a precipitous one day  fall; nor has one since. It was greater too than the 2008 crash that we  have come to call the Global Financial Crisis, when the market shed 8  per cent on its worst day.

Former Australian cricket captain Kim  Hughes was a rookie floor trader with local brokers D.J. Carmichael and  Co at the Perth Stock Exchange on the day. ‘It’s scary, really scary,’  he muttered to an enquiring Australian Associated Press reporter. To add  to the tense atmosphere in the dramatic morning session in Perth, the  air-conditioning failed. Hughes said that while traders had to shout  orders over each other they did not have direct contact with the panicky  investors who were desperately telephoning his office. He felt  frustrated at being unable to help the clients whose savings were  disappearing by the minute. ‘We can’t do much for them because there  just aren’t any buyers,’ he told the reporter.

But there were some buyers. Shares cannot  sell without buyers. Chalkie Gavin Larkin recalls that the only person  buying significant volumes in Sydney – which had the largest turnover on  the day – was the flamboyant stockbroker Rene Rivkin, who was  recovering from surgery to remove a brain tumour. Rivkin had sold all  his holdings earlier in the year when he became ill, fearing he might  not survive the operation.

‘He appeared back on the trading floor  for the first time since his hospitalisation, with his head swathed in  bandages, using a walking stick’, Larkin said. ‘He was pretty much the  only person on the day buying and later credited it as the making of his  second fortune.’ Rivkin, like most other 1980s entrepreneurs sailing  close to the wind, was later to have a spot of bother with the law too.

Some institutions were also buying,  mostly in the morning session, seeing value in the rapidly retreating  market, before they too eventually got cold feet confronted by the  relentless wall of sell orders.

That bleak day inevitably became known as  Black Tuesday. It left in its wake shattered men on the trading floors  of the exchanges. Even hours after the close of trading, most brokers  remained shell-shocked. They had anticipated some downturn following  Wall Street’s crash overnight but they were stunned at the speed and  magnitude of the fall.

The managing director of the stockbroking  firm ANZ McCaughan, David Browne, later recalled a climate of fear.  ‘The way it manifested itself is panic and nobody had seen this before,  nobody could give appropriate guidance as to where the end might be,’ he  said. Browne says both local and international investors were rushing  to sell.

‘We obviously had a lot of wrath. We had a  number of entrepreneurs globally – not just Australia – but globally  who I guess were shuffling paper at a rapid rate,’ he said. ‘And we had  fairly highly geared retail customers, so once a wheel fell off then the  exponential effect was dramatic.’

While there was general surprise and  bewildered head shaking at the worldwide financial slump in the wider  community, there was also a more than a modicum of schadenfreude. The  typically blokey atmosphere in the stock markets and especially on the  trading floors, and the long bull market, had created arrogant and  insensitive self-styled ‘Masters of the Universe’ typified by Gordon  Gekko in the film Wall Street, which premiered just seven weeks after  the crash, with his immortal line ‘Greed, for lack of a better word, is  good’.

Floor trading was a robust activity,  often played for high stakes. It was often more like a sport than the  more sedate corporate life of the companies whose shares they were  trading. Many traders were known to each other only by nicknames, as if  mimicking life on the playing fields. Reminiscing years later, a  gathering of former chalkies remembered Blockhead, Jughead, Huggie Bear,  Chicken Man, Piggy, Wombat, Snake, Fabulous Phil, The Hobbit, The Tree,  Windscreens, Fruitcake, The Skipper, Fingers, Milton the Monster, The  Fuhrer and The Godfather. It was not a place for shrinking violets.

The Sydney Morning Herald eventually  called the October ’87 crash ‘Yuppies Armageddon – a day that dismantled  a lifestyle’. Elsewhere there was plenty of commentary about traders  ‘riding for a fall’ and self-absorbed ‘yuppies getting their  comeuppance’. It would be another twenty years before we saw their like  again.

The impact of the crash on the people  inside the industry was dramatic too, because the market did not recover  for ten years. It has been estimated that in the six months after the  crash, 500 stockbrokers lost their jobs. In the much bigger market of  London, an estimated 10,000 people had lost their jobs within two years.

Trading floors were closed in 1990 to be  replaced by fully electronic buying and selling, and the chalkies were  all retrenched; floor traders became screen jockeys, although most had  little taste for it. The old and new jobs were like chalk and cheese,  demanding a shifted skill set and aptitude.

John McDonough, a former trader still in  the industry twenty years later, but working as a financial adviser with  private clients, felt it was ‘not as much fun’ as it was back then. It  was, he observed, quieter, less colourful, and characters who would make  your day, had left’.

That Black Tuesday of October 1987 was to  be a signal turning point. Things would never be the same again in the  Australian stock market. Old ways were dying out anyway, driven by  technology and globalisation, but this savage day turbo charged change.

There had been significant changes in the  past, such as when exchanges ditched the daily call, when the chairman  of the relevant stock exchange assembled brokers in a room and  systematically (and tediously) went through each listed share to enable  trading in one stock at a time. They switched to the trading post system  that evolved onto the trading floors that operated on Black Tuesday.  There was the amalgamation of the independent city-based exchanges into  the Australian-wide organisation. There was the change from stockbroking  partnerships to limited companies and joint ventures with major banks.  There was the de-mutualisation that led to the current publicly listed  entity that is the ASX. Each of these changes was important and had its  own distinct impacts. However, none were such an efficacious working  catalyst as Black Tuesday.

Within two years, the stock exchange  trading floors were replaced by electronic trading, changing irrevocably  the nature of the industry.

In many ways, the changes in the  operations of Australian stock exchanges mirror the changes in the wider  world itself. They are just as much a result of a globalised world,  aided and abetted by unprecedented technological improvements and the  remorseless advance of financial capitalism as most clearly shown by the  worldwide chain stores in local shopping mall or the late lamented  local car manufacturing industry. And yet at another level it has been  the epitome of it. For a hundred years Australian stock exchanges were  ‘Gentlemen’s Clubs’ to which access was restricted to close relatives  and neatly-brushed private school boys, when suddenly, in less than a  decade, it leapt into the front line of the new Gordon Gekko era of  greed is good.

The change was best encapsulated by Jim  Bain, in some ways the Godfather of the old Sydney stock exchange  modernisation in the 1980s when he described the change in recruitment  to the industry.  Bain was a  third-generation stock broker who by virtue of family patronage had  privileged access to his firm. Yet he was an early protagonist in the  need for change and fought vested interests to eventually lead that  change as the final chairman of the Sydney Stock Exchange before its  amalgamation with other Exchanges into the Australian Stock Exchange.

He said his first twenty years in  stockbroking – the 1950s and 60s – when his firm was considering  employing someone, ‘we asked the following questions: Does the applicant  come from a stable family background? Does that person have a  reputation for honesty and integrity? How many jobs has the applicant  had over their working life? A basic education to Leaving Certificate  standard with reasonable conversational and writing skills was  essential. A university degree was regarded as being useful but not  considered a high priority. The standard of personal hygiene, dress and  appearance as well as the personal presentation of the applicant were  regarded as very important factors.

In the last decade or two, Bain said in  2001, the position had changed to the following general requirements. Is  the applicant going to bring a large amount of captive business? Has  the candidate obtained an MBA degree, or at least two university  degrees? How many jobs have they had during their working career (with  the emphasis on many rather than one job)?

‘Now this may be a more commercial  attitude to building a successful and competitive firm. It could,  possibly, maximise the bottom line’, he said. ‘The cost, in my opinion,  is a lack of long term staff commitment and loyalty to the  organisation’. In these terms, of course, this was nothing more than ‘it  was better in my day’.

But reading between the lines, one can  see that there has been a substantial change in values that might be  broadly conceptualised as a move from integrity, and an instinctive  belief that this is in the long term interests of the firm, to short  term deliverables that make an immediate contribution to the bottom  line. That is not to suggest, of course, that all was goodness and light  until then. The Gentlemen’s Clubs were not paragons of moral  rectitude.

Although the move to computerized trading  had begun the previous week, there were still active trading floors in  1987. These were physical market places where the business of haggling  over and trading shares was done.

Big Bang in London in October 1986  changed it all, as the tsunami of global trends and digital technology  washed over stock markets the world over.