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Plunge Protection Team Stepping It Up

Jun. 15, 2012 12:44 PM ET
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Jay Norris's Blog
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When I was a young man and clerking in the Chicago Board of Trade's MMI pit in the late 1980's you could not tell us that there was no such thing as the "Plunge Protection Team". Back then we called them the "White House Basement Traders", and everyone from the pit traders, to the arbitrage clerks, to the desk managers in both the old MMI pit and the S&P 500 pit over at the Chicago Mercantile Exchange believed that the U.S. Executive Branch had a trading desk which stepped up and bought stock index futures when everyone else was selling them, to protect against market melt-downs such as the crash of October 1987. It was as clear as gin to us that they did this because it was always the same four brokerage houses that stepped up and bought hundred lots, even five-hundred lots, until prices turned higher. The first time it happened we questioned the clerks who had entered the orders into the pit - this was before electronic order entry - and the Solly clerk said, "I know it was crazy man! My guy said just keep buying till I tell you to stop", and the Merrill clerk said, "Yeah I heard the same thing: Just keep on buying …I thought the guy had thrown a shoe, but I saw Jimmy at Morgan doing the same thing". Merrill we felt was first inline because that was Don Regan's old firm and the rumor was he had advised President Reagan to start the team following the crash of 1987 - Regan was Secretary of the Treasury in Reagan's first term, and his Chief of Staff the following two years. What was so mind-bending about this behavior for us was those same houses were generally very risk sensitive. It was rare in our pit to see a hundred lot, let alone see the big firms spraying the pit with hundred lot buy orders in extremely volatile trade - every time the market tried to head south in earnest.

The alleged White House Basement Traders were very effective at turning markets higher by running the shorts out and shifting down-trends to up-trends. Once the pit traders saw the Merrill, Morgan, Solomon, and Goldman clerks start flipping those hundred lot buy orders, or 5-hundred lots in the S&P 500 pit, the locals started reversing shorts and getting long ahead of the Basement Trader's orders and to everyone's astonishment the Dow would close higher on the day after being down 150 points going into the last hour. Later we heard rumors that the alleged traders moved their office out of the basement and into the Executive mansion next door. I had forgotten about all of this until years later when the next generation of analysts and traders started talking about them again, only this time they were the "Plunge Protection Team".

I started thinking about all this again earlier in the month while enjoying a short vacation. I had seen the damage the last U.S. non-farm payroll report had done to the stock market and how precarious the market looked - like an icicle hanging from the roof in late March. I thought for sure June would be similar to May - not pretty. But somebody thought different, and for all the bad news on the doorstep, and on the horizon, the S&P's rallied nearly 5% over the past 2-weeks. This morning I was back in front of the screens and spotted what I thought was a near perfect sell set-up in the S&P's - and with a negative retail sales number as a bonus. Well it's a good thing I was quick to put a break-even stop on that trade once I had a small lead on it, cuz I was wrong - price shrugged off that second negative U.S. retail sales figure and jumped right back up to test the previous session's high. And while I'm not yet inclined to start scouting buy set-ups and signals, if ya' can't sell 'em, it's only a matter of time before you gotta' start buyin 'em.

Trading is a risky endeavor and not suitable for all investors!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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