Just three weeks after Dow Jones futures and options contracts began trading, the offshoot of the venerable Wall Street index survived a severe test of its powers as a risk-management tool.
Traded on the Chicago Board of Trade and Chicago Board Options Exchange, the futures and options give investors a chance to bet where the Dow Jones Industrial Average will stand on a given day.
The index tracks 30 of the biggest U.S. companies, including General Motors, AT&T and IBM.
The contracts have been promoted as a tool to help protect investors against sudden price swings on the stock market.
Critics had argued that with much of the trading coming from small investors in an index that has a market value of $2-trillion, fraud and manipulation could exacerbate losses on the stock market and bankrupt unsophisticated investors.
But the Dow futures and options response to the largest point-drop ever on the New York Stock Exchange proved those critics wrong, exchange officials said Tuesday.
Volume Monday, when the Dow Jones Industrial Average plunged a record 554 points, rose to 20,000 contracts. That's up from 18,000 contracts on average for the previous week, signaling strong interest in the product, exchange officials said.
Further, all trades were settled in an orderly fashion at the end of Monday _ erasing fears people could not come up with the cash to pay for their mistakes, officials said.
The Dow futures and options served two purposes during the turmoil for both institutional and smaller investors, said Board of Trade chairman Patrick Arbor.
"People today were moving their money back into the equities markets, didn't know which stock to buy, but they knew the Dow Jones 30 were the blue-chip and premier stocks and decided to buy into that," Arbor said Tuesday, as the Dow rebounded a record 337 points.
"And those people who had inventories of stocks that they were worried about (before the crash), they bought the Dow expecting that there would be a correction."
A person holding stocks in a company like IBM may have suffered sharp losses during the correction but could have offset those losses if he or she bet correctly in the futures market that the overall Dow index was going to fall, he said.
Barry Lind of discount brokerage firm Lind-Waldock & Co. said many of his clients had been buying Dow futures and options in case just such a correction did occur.
"The majority of our customers today took a look at their stock portfolios, saw what they had lost and were very thankful that there are futures to cover them," Lind said.
Nobody likes to see a day like Monday, he said.
"There was panic in the market, but I think the Dow (futures and options) worked real well."