Bull Market: The rise and eclipse of Australian stock exchanges

Bull Market:

The rise and eclipse of Australian stock exchanges

John Tilston

The Yellow Sail Company

2016

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Copyright © 2016 by John Tilston

All rights reserved. This book or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of the publisher except for the use of brief quotations in a book review or scholarly journal.

First Printing: 2016

ISBN 978-1-326-56882-5

The Yellow Sail Company

2D/28 Bayview Road

Runaway BAy, Queensland 4216

www.johntilston.com

To Rosey, who, very fortunately, still needs me and still feeds me

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Contents

Preface - The importance of Australian stock exchanges.ii

Introduction:-Black Tuesday 1987

The antecedents: London sets the tone

The seeds are sown

Gold

Investors push for a market place

Mining eventually kickstarts Sydney too

Growing pains

Federation and drought

Adjusting to post-war swings and roundabouts

Bulls, bears steadied by kangaroos

Post War Boom

The Poseidon Bubble

Politicians step in

The Big Bang DownUnder

The great consolidation

The briefly much admired raiders

Stockbrokers’ cartel busted

Scams, rip offs, scallywags and scoundrels

The GFC

The Modern Age – Platforms disrupt business as usual

The search for relevance

Timeline

References

Glossary

Preface

The importance of Australian stock exchanges

The roots of Australia's prosperity are sunk deeply in its past. It is a resource country; it has a large endowment of natural resources in relation to the size of its population. It has always been so, despite periods of strong population growth.

Since European settlement, natural resources have dominated exports, starting with wool, then gold in the early and mid-1800s through to iron ore, coal and natural gas in the first decades of the 21st Century.

Australia's economic development has also benefitted from the entrepreneurial spirit of pioneer communities, which have not often been held back by powerful groups protecting their own historic interests. In Australia's case, its early settlers were not constrained by the rigid class system of home, nor the stultifying effect of land tenure, in which the landed gentry had a lock grip on the towns and much of the countryside. Yet the British Empire that sent them to our shores was based in trade, supported by a fearsome navy, and the rule of law. Early settlers were able to seamlessly integrate into the well oiled channels and commercial rules forged to facilitate that trade.

It was also the quality and arrangements of Australia's institutions that enabled expansion. Most have reacted to the need for change, at the appropriate time. Initially modelled on British institutions and procedures, and the rule of law that favoured no man over another, these institutions of necessity often innovated ahead of developments in more conservative London. Trying circumstances imposed by isolation, lack of deep-pocketed investors, cash-strapped governments and the self-imposed urgency to get things done, drove these new ways of doing things.

And despite those who view history through an ideological haze, there is little evidence of sustained serious exploitation of Australia by the British during the time of its Empire, yet nor was much help forthcoming from London either.

Amongst the most significant institutions have been the Stock Exchanges of the various cities and regional centres that were instrumental in mobilising capital and enabling regional development. They were driven for well over a century by the need to fund the development of capital-hungry resources and sustained by speculators looking for a slice of the action. They also mirrored the development of the business world as a whole, from the early days of sole traders, partnerships, family firms, to corporatisation and globalisation, from deals done in corridors, on trading floors and on street corners through to fully digital transactions. In their boisterous meeting places shysters, charlatans and gamblers rubbed shoulders with men of high integrity. All in their own way contributed to the growth and development of Australia.

This book traces the history of Australia’s stock exchanges from the early days of manic gold rushes to the modern era of dark pools, algorithms and high frequency trading.

Introduction

Black Tuesday 1987

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, brokers got it from the newspaper morning 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 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’ but it missed the New York 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 [often meaning a fall of at least 20 per cent in share prices over a two month period]. ‘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 traumatic fashion on the nation’s stock exchanges’ trading floors that were still then in operation, in what turned out to be their last major drama.

In Sydney, a quarter of hour before trading opened at 10 o’clock, the large green chalkboards above and around the trading floor were already stacked with sell orders with no buy price to be seen.

Gavin Larkin, a novice ‘chalkie’ – one of the young men who recorded latest bids and offers prices for shares on the chalkboards 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. Stocks 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. Every sale requires a buyer and, 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 2015 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 being made, bleak though it was. 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, which reflected the mood within.

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 mark up 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 tension 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 was 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 stockbroker Rene Rivkin, who was recovering from surgery to remove a brain tumour. The flamboyant Rivkin had sold all his holdings earlier in the year when he became ill, fearing he might not survive the operation.

The bulky, lumbering, cigar chomping Rivkin, fingering his ever-present worry beans ‘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. 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 headshaking 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. The nature of the industry was changed irrevocably.

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’.

Black Tuesday of October 1987 was to be a signal turning point in stock exchanges. 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 were operating 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.

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 modernisation of the old Sydney stock exchange in the 1980s when he described the change in recruitment to the industry.  Bain was a third-generation stockbroker 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 major change in values that might be broadly conceptualised as a move from integrity, and an instinctive belief that the long term interests of the firm matter, 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 the brokers liked to believe they were part of were not always paragons of moral rectitude. 

Of all the pivotal moments in the history of stock exchanges, the late 1980s were the most momentous. The so-called ‘Big Bang’ in London in October 1986 and similar changes in exchanges in Australia changed the market forever, as the tsunami of global trends and digital technology washed over stock markets the world over.

Chapter 1

The antecedents: London sets the tone

The pioneers of Australian Stock markets were overwhelmingly from Britain and they brought to these shores the collective experience of share trading in the capital city of the British Empire.

The London Stock Exchange opened under a formal membership subscription basis in March 1801, to become the first regulated exchange in the world: it represented the birth of the modern Stock Exchange based on a model that was to endure for almost two hundred years before technology completely disrupted the business model.

Though there are sketchy reports now surviving of trading in debt and government bonds in 12th Century Paris, the first recognisable stock exchange opened in Amsterdam in 1602 specifically to trade shares in the Dutch East India Company, the first recognisable corporation of the modern era, illustrating the key, if obvious, requirement of a stock exchange – it needs to have company shares or government bonds to trade. It is also no coincidence that modern stock exchanges had their origins among the traders and adventurers of the ports of London and Amsterdam in the 17th Century. These adventurers were seeking to make their fortunes trading in far off exotic places and, unlike their earlier counterparts like Christopher Columbus operating with the support of the Spanish Crown, they lacked the financial support of their monarchs. Thus they needed to raise cash from private sources to fund their costly