On this date in 1901, the amazing ride known as the “Nipper Panic” ensued. this was a day that began with rumors and ended with incredible market turmoil.
Northern Pacific Railroad was referred to as “Nipper” back in 1901. On May 9, 1901, the price of Northern Pacific went from $160 to as high as $1,000 during the trading day, before settling at a price of $325 at the close.
What brought about such a panic? Two syndicates, supposedly working in unison to elevate the price of Northern Pacific, had a difference in opinion as to what was considered “high” and “high enough.”
However, in order to gain a sense of perspective on the Nipper Panic, we need to look at what Northern Pacific was trading at in the year prior to May 1901. On May 3, 1900, Northern Pacific had the following quotes (New York Stock Exchange. New York Times. May 3, 1900. pg. 11):
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Open: $57.75
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High: $58.00
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Low: $57.50
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Close: $57.75
The above data indicates that the share price of Northern Pacific rose from $57.75 on May 3, 1900 to the closing price of $143.50 on May 7, 1901 (or +148.48%), shortly before the “panic” set in (New York Stock Exchange. New York Times. May 8, 1901. pg. 11.).
The way that syndicates worked, at the time, was a group of well-heeled investors (now called “accredited investor”)* proposed pushing the price of a stock up or down by informing the public of their plans after having bought a large share of a specific company. With this information, depending the names of the people involved in the syndicate, the general public would place their bets on the direction of the stock, either long or short.
In this instance, the involved syndicates were the Harriman and Hill-Morgan. Initially, the Hill-Morgan and Harriman syndicates were pushing up the share increase of Northern Pacific. However, at a certain point, some members of the Hill-Morgan syndicate felt that the shares had risen “enough” and began, in opposition of the syndicate, to sell their shares.
Meanwhile, the Harriman syndicate had automatic orders to buy any and all shares of Northern Pacific as soon as they became available. Being such large shareholders, market makers were more than glad to have a willing buyer at any price and put the shares to Harriman.
Unfortunately, the illiquidity of the market not having enough sellers to offset buyers caused the shares of Northern Pacific to attain the $1,000 level. The carnage imposed on the sellers/short sellers was only relieved once the syndicate participants agreed to ease their automatic buying and selling program.
This is why my econ professor emphasized that cartels don’t work in the long run (see OPEC). Someone is always going to get greedy and ultimately reneg on the agreed upon terms (see Saudi/Russian Oil price war). Not mentioned in that awesome econ class is that one party in the cartel will end up bruised and beaten beyond recognition while the other side could be considered a “winner” (see U.S./Canadian oil producers).
In this case, the breakaway members of the Hill-Morgan syndicate not only sold but they short-sold the shares of Northern Pacific. The brutality of the shares rising from $143.50 to $1,000 and then closing at $325.00 had to leave a mark.
Other data from the changes in price from May 8, 1901 to May 9, 1901:
see also:
*Notes:
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The topic of the "accredited" or “sophisticated investor” was addressed in our September 2, 2011 article titled “There is no such thing as a Sophisticated Investor.”