The Chicago Board Options Exchange (CBOE) and the Dow Jones Indexes co-hosted a Symposium on the 1987 Stock Market Crash at the CBOE this morning, marking the upcoming 20 year anniversary of the ’87 Crash.
The panel was comprised of market experts representing the views of trading, clearing, exchanges and market analysis, all of whom played key roles in the 1987 markets, including William J. Brodsky, chairman and chief executive officer of CBOE, who was president and chief executive officer of the Chicago Mercantile Exchange (CME) at the time of the crash.
On Monday, Oct. 19, Black Monday, the stock market crashed. That day the DOW plunged 508 points, 22.6%, and traders were filled with panic.
But it got worse on Tuesday when the stock market plunged at the open. Trading at the New York Stock Exchange was halted, the CBOE halted trading at 11:45 (CST) and the CME halted trading about a half-hour after that.
With the announcement of major corporate buybacks the market was able to turn and end the day up 100 points, Chicago having played an instrumental role in getting the markets to function again that day.
A task force appointed by President Reagan, led by investment banker Nicholas F. Brady, who later because the U.S. Treasury secretary, was given 60 days to issue a report dissecting the crash. The Brady report, released Jan. 8, 1988, highlighted that program trading, mainly index arbitrage and portfolio insurance, generated high volume sell orders that exacerbated the decline.
While there’s no agreement on a signal factor that caused the crash of ’87, at the time there was a widening trade deficit, threat of higher interest rates aand a weakening U.S. dollar.
“The crash didn’t come out of nowhere,” Brodsky says.
The Friday before was an expiration Friday and there were many sell orders that hadn’t been filled.
“You knew going home that day that Monday was going to be bad,” Brodsky said, adding, “It wasn’t until you were living through it that you realized how bad it was. One of the things that was the most telling was that there was a call from the NYSE to the CME at 7 a.m. CST to say that their order system was receiving all sell orders. So before the market opened we knew it was going to be bad. And what we didn’t know on Monday was how bad things were going to be on Tuesday. And one of my jobs Monday was to make sure clearing systems worked and the payment settlement systems worked after trading was halted.”
Afterwards blame was thrown around and headlines marked whose finger was pointed where.
When learning from the past, how can we see the signs of another possible crash? Overvaluation is one signal, but sometimes, you just can’t see it coming, and even if you could, it’s usually too late.
It would be interesting to hear from blog readers about first-hand experiences of that day. Please write in to our reader’s blog and we may post your story.
Tags: stock market crash
