Nothing bores Wall Street like a dull market, which is not to say that everybody was entertained this fall when the Dow Jones Industrial Average stepped off a cliff. In two days, Sept. 11 and 12, 120 points were stripped from the index in some of the heaviest trading ever known. At the New York Stock Exchange no one had seen such a sell-off in 20 years.
On the floor of the exchange, not far from its entrance at 11 Wall St., Jimmy Jacobson and his brother Robert Jr. were supervising trading in several stocks that were getting hammered. Anheuser-Busch, Kellogg and United Technologies were sharply down. Nearly from the opening bell, the brothers were inundated by paper, almost all of it marked "sell."
"It was like you were standing under Niagara Falls," remembers Jimmy, a serene-looking man with neatly combed dark hair, "not knowing if anyone was ever going to turn off the water." At the end of the two days, more than $150 million worth of stock had passed through the books of Benjamin Jacobson & Sons, all of it headed south, and the firm had taken a loss of a quarter of a million dollars.
Across the floor, Robert B. Fagenson was also thinking in imagery derived from the Deluge. "It was as if you were standing in the surf with the tide coming in," he says. "You sweated, you cried, there was nothing you could do." At regular intervals, Fagenson would see a phalanx of floor brokers come around the corner of the trading post to his right like zombies on the march, bearing orders to sell their stock at any price.
Any sensible man would flee for the exits at a time like this. But the stock exchange's specialists--men like the Jacobson brothers, Bob Fagenson and 419 other brokers on the NYSE floor--are required by exchange rules to hold on for dear life, trading stock from their own accounts against the prevailing flow.
Part auctioneer, part dealer, part mediator, the specialist is the figure who most distinguishes the New York Stock Exchange from much of its competition among the world's major stock markets. Using their own money and bank loans to trade, these independent brokers are charged with keeping an orderly market in each stock assigned to them by the exchange. That's a chore so demanding in today's disorderly and volatile stock market that some critics have taken the opportunity to resurrect old questions about whether the specialist system will survive.
These are not the pin-striped, yellow-tied chaps the public generally associates with Wall Street. These are the hard laborers of the market. As the din of traders' shouts ricochets off the exchange's high marble walls, the specialists' jaws incessantly work on wads of chewing gum to ease the tension of making a thousand split-second decisions in a 6 1/2-hour trading day. They grow splayfooted from years of standing on the hardwood floor or leaning back with their elbows on the waist-high counters of their trading posts.
They have no use for the research reports that the big brokerages sell to investors by the trainload, all purporting to give a rationale for buying or selling a stock.
"When your investment horizon is to buy for breakfast and sell before lunch, you can't be too wedded to opinion," Fagenson says.
In return for committing his own capital to supervise the trading in his stocks, the specialist is awarded a coveted franchise, producing profits that are the envy of every other business on Wall Street, as well as salaries that can range into six figures.
As long as a stock is trading within a narrow range, as most do when they're not being driven straight up or down by a news report or a market panic, the specialist's position directly at the center of trading gives him a distinctive opportunity to make money buying and selling shares at prices just cents apart.
Without a specialist, a line tracing the price of any widely owned stock would resemble the Sierra--peaks separated by sharp notches. Take a stock selling for $20 a share. If a 100,000-share buy pumps the stock up $2, in the next moment a 200,000-share sale might kick it down by $2.50. Good luck to any investor trying to trade that stock at a fair price while it is careening from $10 to $12 and back down to $9.50 over a matter of minutes.
"It's the function of the specialist to iron out these short-term differences," says William C. Freund, a business professor at Pace University who spent 18 years as the Big Board's chief economist. The ideal is for the specialists to keep the market so orderly that each trade takes place at a price within an eighth or a quarter of a point of the previous trade.
In simple terms, the specialist does this by trading a stock in opposition to its short-term trend. When everybody else is buying, he is selling, and vice versa.
The specialist also maintains a book of "limit orders," which are purchases or sales to be executed for customers when a stock's price reaches a specified level. For such trades, he receives a commission.