CALL TO ARMS
before the Index Trading Coordination Committee ("ICC") meeting,
offices of Salomon Brothers,
New York, New York,
September 30, 1986.
every passing week that showed an increase in the transaction
volume of S&P 500 futures, there was a commensurate increase
in the attack against them. This negativism was part of an
increased attack on index investing, a relatively new investment
methodology. The trend toward index investing was growing and
perceived as a threat to orthodox equity investment strategies.
It was the beginning of a difficult conflict between these
enhancement strategies utilize index futures and options. Consequently,
our markets became the target. Since index futures were new,
mysterious, and had no establishment constituency, they took
the brunt of the attack. No one spoke up in our behalf, no
one came to our defense, and no one explained our function
or our necessity.
developed a long-range strategy. However, we needed assistance
from the financial establishment in order to initiate our short-range
plans which involved an immediate counter-attack. We looked
to our equity-based members who were index futures users and
arbitrageurs. They understood the index market and the role
of futures; they used our market to the benefit of their customers
and their firms; and they understood that index futures were
an outgrowth of modern investment strategies and had become
an integral part of the equity market. These member firms had
credibility with the media and we had to energize their voices.
We implored that they assist us in a counter-attack.
who is not aware that index investing—and consequently index
futures markets—are under attack, is either dead, asleep, or
living in Alice-in-Wonderland. In the past two weeks, I have
heard and read more negative diatribe about index strategies,
program trading, triple witching, and stock market volatility
than I have in the past two years. Everyone, it seems, who has
the power of the pen, and is even remotely connected with the
financial arena, has felt compelled to expound upon the evils
unleashed by index investment strategies and the use of index
futures. And, let's face it. It is true that the new strategies
are often connected to futures and options—instruments suspected
as the work of the devil. The exchanges, where these mysterious
instruments are traded, are predominantly located in Chicago—not
a locale that is associated with virtuous finance or a place
that inspires confidence. So why not attack the credibility of
these markets? Why not question their necessity? Cast doubt their
need tell no one in this room what the problem is. I need not
explain that index investment methodologies are perceived to
threaten orthodox investment strategies. I need not illustrate
that this conflict boils down to income flows between two different
profit centers. I need not illuminate that future markets have
taken the brunt of this attack. That our markets are blamed whenever
the equity market goes down but receive no credit when the equity
market goes up. Even John Shad admitted recently that all the
undesirable effects of program trading—the volatility and price
swings on expiration dates—get all the publicity, while the desirable
effects of their nature go unnoticed.
that! After four years of a bull market as great as any on record
in the stock market, with a budget deficit larger than mankind
has ever before witnessed and no relief in sight, with a record
trade deficit, with economic forecasts and data that is rather
sad, with interest rates ticking up, with inflation showing some
sign of life, and with a tax reform package that penalizes you
18-1/2% for holding on to your investment, one still needs to
find a culprit for a market correction. And, if a culprit is
needed, why not blame it on index futures.
in this room are members of our community who understand the
problem, who are concerned about the problem, and who, we believe,
can help us do something about it. We called you together because
we feel you represent the predominant users of index futures
and options, because you know the value of these instruments
in index investment strategies, and because you can act as a
source for our credibility with the media and the public. You
are the professionals and experts the media respect. We asked
you to join with us today so that we could: Underscore the severity
of the problem; provide you with substantive facts and statistics
with which to combat the problem; and, implore that you help
us educate the media and aggressively come to the defense of
the markets that you utilize.
face it. The truth is that index enhancement strategies represent
relatively new, cost-effective methodologies for equity investment.
Our markets allow you to effectuate these innovative strategies
in a rapid manner. Simply stated, our markets represent a marriage
between, modern market strategies, modern portfolio management
and present-day technology. The orthodox investment establishment
does not like what we represent. They view us as a threat to status
quo. In order to satisfy their preference, or those who
simply fear change, we would have discard modern investment theory,
destroy the computer chip, throw the cathode-ray tube out the
window, abort the telecommunication revolution, and return to
the day when the rotary telephone was our main link with the
investing, like block trading, like mutual funds, like futures,
like stock options, like Treasury bill futures, and like the
many other innovative and revolutionary ideas of the last twenty
years, are indicative of the changing times. They are a result
of the here and now. It is incumbent upon those of us who witnessed
and participated in these changes and who understand the changes
and the reasons for their necessity to stand up and be counted.
are here to ask you to help us explain the virtues of our markets.
We need assistance in educating the media about the function
of futures in modern investment techniques. We need you to say
why we are important to the marketplace. We need you to help
us get the word out. Otherwise, all we will have in public view
is the irresponsible, misguided, misinformed, and sometimes intentionally
malicious impressions from those who do speak to the writers
of financial columns who themselves know so little. Unfortunately,
it does not end with the media. Remember, there are people who
read this nonsense. The readers are the voters, voters affect
the legislators, and legislators affect the regulations. And
whether you like it or not, most people believe what they read.
And if I'm paranoid, as the saying goes, it does not necessarily
mean I'm wrong.
there are enemies of markets out there. Enemies who are against
change, against innovation, against the free market system in
general and against index investment strategies in particular.
A misinformed press is powerful ammunition for their weapons.
And if anyone here thinks I exaggerate, that I overestimate the
danger, allow me to dislodge you from this notion. I am no newcomer
to this scene. You are hearing it from someone who has been on
the firing line for the past twenty years. I have encountered
the enemy before. They use real bullets and they mean business.
have a comprehensive defense strategy which includes both long-range
and short-range plans. Our long range plans include a mass education
program. Primarily this will focus on academic institutions.
We need colleges and universities to include modern investment
strategy and the use of our markets in their academic programs.
We will also authorize and encourage studies about futures and
their impact on volatility, investment, capital formation and
the equity market. But such programs takes time.
range, we propose an immediate media counter-attack. To this
end, we want you, your associates, and anyone else you can influence
to assist us. We suggest you stop dodging the questions from
reporters. Stop hiding. Become visible. We want you to even seek
out the members of the financial press and give them your opinion.
Educate them and get your viewpoint into print.
to them the difference between triple witching—which occurs four
days a year—and the use of futures in index investment strategies,
the other 361 days. Explain what our markets are about. Explain
that arbitrage is as old as mankind, that it serves an important
purpose in leveling differences between different markets, that
while by definition it is riskless, there are risks, and that
it requires know-how as well as capital. Help us educate the
media about the benefits our markets provide to investors—large
and small. Explain to them how professional money managers use
index markets to increase the return on portfolios on behalf
can show them that small investors who invest in mutual funds
benefit by these strategies. You can tell them that the world
has changed and that we represent that change. You can tell them
that you cannot go back in time. You can explain how our markets
provide buyers when the sellers want to sell and vice versa.
You can discuss fundamentals that affect market movement and
that our markets—no different than cash markets—respond to supply
and demand. And you can help us explain that these markets represent
efficient, cost-effective and a modern-day techniques that work
in harmony with the stock market. Explain to them that we are
all one market and cannot exist without each other.
you will all roll up your sleeves and become visible and make
your voices heard, you will provide the immediate return of fire
needed now. This will coincide with some of our other short-range
plans which are aimed at educating the financial press. More
important, your immediate actions will give us time to put in
place our long-range strategy which is designed to permanently
preserve our markets and your right to use them.
by permission. Excerpted from Melamed on the Markets, by Leo
Melamed. John Wiley & Sons, 1993
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