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