One thing that many new traders do not understand about the market is the psychological aspects of trading. The study of the market psyche is a discipline in and of itself, but you don’t need to be an expert to recognize the effects. Understanding that the market is driven by basic emotions is the first lesson in market behavior. Understanding what the collective in- vesting public is thinking is a different art, but one that is likewise essential in learning about market behavior. The Gault family’s experience demon- strates how such an event can change the pit psychology of the market. In that case, it was only for a day, but what happens when the entire nation is caught up in the same emotional roller coaster? Many books have been written about the behavior of individuals in terms of market psychology,
but those who truly understand the nature of the market understand that it is nothing if not dynamic.
The mood of the market can be changed by months of sluggish action or by a single event. The market can go from a boring, low-volatility session to one that is full of price swings and action. It’s been said that those on the floor really work just 10 percent of the time; the other 90 percent of the time is spent waiting for that 10 percent flurry of activity. Nevertheless, seasoned veterans know that you must remain alert for a change in conditions at all times.
It could be argued that events that drive the market in either direction are nothing more than catalysts and not true causes of the action. But re- member, a trader’s job is not to outthink the market; it’s to profit from it! Although it might sound cold, trading is not altruistic. To be a good trader, you must see the market from two distinct perspectives: You must look at the smaller waves of emotion that drive the intraday volatility, but you must also always be aware of the much larger megawave of emotions that is driving the collective investing public. Smaller emotional events that might drive the market are such things as the fall of Enron and the impact of the loss of billions of dollars in market cap.
The ancillary effects of the event are much larger. The passing of the Sarbanes-Oxley Act, which could end up costing the business community millions of dollars, might create an environment that drives business over- seas. This is a difficult subject that will be debated for some time. But every now and then a particular event changes everything. Such an event hap- pened on September 11, 2001.
9/11
The events of September 11, 2001, will be written about for years to come. But rather than spend time writing about the causes behind the event, I will tell you what happened in my world during those difficult days. Many things happened behind the scenes at the CME, and much of what was done, directly or indirectly affected the entire market and the psychology that pervades it. I think of the event itself as the Kennedy assassination of our time. Everyone remembers exactly where they were that morning.
If any single event let the entire world know that the days of bull market innocence had come to an end, September 11 and its aftermath were it. In fact, the event constitutes a perfect case study of the changing of the col- lective psychology of the marketplace in a single day. No other news event caused more market disruption and confusion than that. Understanding the emotional impact of the event is important for anyone trading the markets
today because much of the market psychology that surrounds today’s trad- ing was caused by 9/11!
For me, September 11 started like any other day with an early trip to the CME floor to do CNBC and Bloomberg TV before heading back to the Commerz offices. I was scheduled for a 9AMTV appearance to talk about the
economic releases coming out that morning. As I watched CNBC, I heard Mark Haines say something about a plane hitting the World Trade Center. My first reaction was to call Vinny and Denny, who were at the Nomura offices across the street from the WTC, at the World Financial Center. I asked them if they could see what was happening and if they were safe. They told me they were fine but it looked as if a traffic copter or something small had hit the tower. From their angle it was difficult to see the extent of the damage caused by the first plane.
Walking on the upper trading floor at the Merc, I saw my old friend Peter Yastrow, who had taken a position with Cantor Fitzgerald covering their proprietary traders and brokers. Cantor’s New York offices were on a high floor in the tower that had been hit, and Peter and his colleagues at the desk looked concerned. Something was wrong—clerks were wiping away tears as they left the floor. When I asked what was happening, I was told that the traders and brokers on the other end of the phone in New York had realized they were not going to make it and had asked the clerks in Chicago to say goodbye to their families for them. Imagine being on the phone with people who know they’re going to die, and there is nothing you can do!
Although the stock market had not yet opened, the electronic futures market began to break hard. As we watched the TV for details about the first tower, we all looked on in horror as the second plane hit the other tower. It was at this point that the event became world changing. People sensed the panic. Brokers began yelling that there were other planes in the air not accounted for and that the CME could be a possible target. I urged everyone to calm down, and allowed anyone to leave if they wanted to. I sent my whole crew home and had told everyone associated with my operation that I would call them with more information as it became available.
I was called to the control center adjacent to the S&P pit to confer with the New York markets on whether they would open. During the course of the teleconference, we all turned to the TV as Mark Haines announced that the first tower had collapsed. With that, it was decided that the stock market in New York City would not open and that the CME would close its futures market. I immediately called Vinny and Denny in New York. They had fortunately left the building after the second plane had hit. Later they would tell me that they could see the second plane as it sped along the river before hitting the second tower. At that point they evacuated the World Financial Center and the island of Manhattan.
Everyone else was vacating the CME floor, but I felt that I should stay to help with any disaster recovery that might be necessary. Aside from being on the CME board of directors, my responsibilities also included a seat on the Commerzbank Futures board. The U.S. headquarters for the bank was located in the World Financial Center a few floors above Vinny and Denny. By the time I called, the entire banking division was out of the building and setting up shop in a warehouse some 25 miles away in New Jersey. I knew that Frankfurt would ask about the situation and how the exchange was dealing with the catastrophe.