Equity markets, particularly the Dow Jones Industrial Average, had a pretty severe whipsaw following the as expected quarter percent cut in the Fed funds rate. The Dow immediately dropped 100 points, then rallied 200. That begs the question: What was the market actually expecting?

The immediate 100 point drop following the announcement was either proof that some participants were holding out hope for a 50 basis point cut or a reaction to the somewhat hawkish tone by the Fed, which said in its statement, “The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.” Or in other words, we will give you this one be we are serious about this inflation thing now.

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On Monday Oct. 29 the Supreme Court heard oral arguments in a case involving Klein & Co. Futures Inc. and the New York Board of Trade stemming from a scandal that culminated in the downfall of the Klein clearing firm in May of 2000.

The question before the Supreme Court is whether a futures commission merchant (FCM) may sue a U.S. futures exchange for bad faith misconduct. This summer the Supreme Court agreed to hear Klein’s appeal on whether it had standing to sue the New York Board of Trade. Klein’s case was dismissed on those grounds by the trial court and later dismissed by the New York Second Circuit Court of Appeals.

The Commodity Futures trading Commission (CFTC) found in a 2001 order that the New York Futures Exchange (Nyfe, a subsidiary of Nybot) violated the Commodity Exchange Act by not following its own market oversight rules, which allowed for the gross manipulation of option settlements in the Pacific Stock Exchange Technology Index (P-Tech, which was traded at Nyfe) by Norman Eisler, a Klein customer and chairman of Nyfe and the P-Tech settlement committee at the time.

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Today marks the 20th anniversary of Black Monday when the Dow Jones Industrial Average plummeted more than 500 points, about 22%, causing massive panic in the markets. The event has double meaning to the futures industry because not only did it affect traders involved in the relatively new S&P 500 index futures market but there was an attempt to scapegoat those markets after the crash and if it weren’t for the cool and knowledgeable head of former Fed Chairman Alan Greenspan, those attempts may have succeeded.

It is a lesson that should be learned, because despite what we know about market cycles and bubbles, with every major market downturn — despite signs and warnings — there are those who prefer to find a scapegoat, whether it is derivatives, hedge funds or some other boogey man.

There have been many retrospectives on the crash and the question always falls to can it happen again? Our knowledge of markets and cycles provides an easy answer: yes, it is the nature of markets. Of course the more pressing question is: will it happen today or in the near future?

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We don’t know if Treasury Secretary Henry Paulson sees the Commerce Department’s data before its official release but Paulsen’s comments on the likelihood of continued weakness in the housing sector yesterday may have taken some of the sting out this morning’s news of a 10.2% drop in housing starts for September. The figures pushed housing starts to its lowest level in 14 years according to reports. Building permits also declined, dropping 7.3% from the revised August number and 25.9% from September 2006 numbers. Paulsen said in a speech at Georgetown University that the weak housing sector poses the greatest current risk to the economy.

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To the strands of Phil Collins’ “Land of Confusion” the Chicago Board Options Exchange and Dow Jones Indexes this morning at the CBOE kicked off a panel examining the 1987 Stock Market crash as its 20th anniversary nears. The panel includes CBOE Chairman and CEO Bill Brodsky who was president of the Chicago Mercantile Exchange at the time; Blair Hull, chairman and CEO of Matlock Capital and a market maker on the CBOE at the time; Wayne Luthringshausen, chairman and CEO of the Options Clearing Corporation and Philip J. Roth from Miller Tabak.

Brodsky noted that there was quite a lot of market turmoil leading up to “Black Monday,” and as he went home the previous Friday, he was not looking forward to Monday. Brodsky compared it to a tornado, “ You knew it was coming, but didn’t know how bad it would be.”

Blair Hull noted that the episode should be referred to as black Tuesday because while the dramatic fall on Monday was bad, the uncertainty on Tuesday was worse. “Tuesday was when the panic set in,” Hull said, noting that their volatility measures were as much as 30 points off as they attempted to make markets.

Hull also gave credit to the Chicago Board of Trade because its Major Market Index (MMI) was the only stock index to remain open for trade that entire day.

Many analysts feel that equity markets are in a similar situation today so it will be interesting to hear what similarities the experts see. Stay tuned.