TABLE OF CONTENTS

INTRODUCTION AND EXECUTIVE SUMMARY xi

CHAPTER ONE - BACKGROUND AND DESCRIPTION

OF TRADING STRATEGIES

A. Index-Related Trading Strategies 1-1

1. Asset Re-Allocation and Hedging 1-1

2. Portfolio Insurance 1-2

3. Index Arbitrage 1-3

B. Use of Automated Systems for Programs 1-5

C. Prior Commission Studies of Index Trading 1-7

1. Background Studies 1-7

2. Expiration Volatility 1-7

3. Non-Expiration Volatility 1-8

4. Concerns Over the Cascade Scenario 1-9

D. Methodology of the Division's Market

Reconstruction 1-10

1. Analysis of Index Trading during the

Market Break 1-11

2. Analysis of Overall Trading During the

Market Break 1-15

CHAPTER TWO - CHRONOLOGY OF TRADING

DURING THE OCTOBER MARKET BREAK

A. Introduction 2-1

B. Chronology of Trading During

the October Market Break. 2-4

1. October 6 2-4

2. October 14-16 2-6

3. October 19 2-12

4. October 20 2-19

C. Commission Regulatory Actions During the

Market Break 2-24

1. Commission Monitoring and Supervisory

Activities 2-24

2. Commission Consultation and Decision

Making Activities 2-26

CHAPTER THREE - THE EFFECTS OF DERIVATIVE PRODUCTS

A. Institutionalization 3-1

B. Market Basket Trading 3-2

C. The Effects of Futures 3-3

1. Benefits 3-4

2. Price Impacts of Futures 3-6

D. Analysis of October 1987 Trading. 3-9

E. Summary and Issues Requiring

Further Review 3-16