‘BLACK MONDAY MAY HAPPEN AGAIN’
Cautious traders refuse to rule it out despite advent of modern trading tech
ON the 30th anniversary of the 1987 stock market crash, United States stocks are at a record high and investors are concerned that steep valuations may mean a correction is overdue, despite healthy corporate earnings and economic growth.
But could a repeat of “Black Monday” happen? Modern trading technology, changes to the way stock exchanges operate and in the way investor funds are managed should make a repeat of the 1987 crash unlikely. Yet cautious traders refuse to rule it out.
“We have learned a lot from the mistakes of the past in terms of the reaction or overreaction,” said Ken Polcari, O’Neil Securities director of the New York Stock Exchange (NYSE) floor division.
On October 19 1987, following large declines on Asian and European markets the previous week, the Dow Jones Industrial Average (DJIA) plunged 508 points, or 22.6 per cent, for the biggest-ever single day decline in percentage terms by the bluechip benchmark.
A decline of up to 20 per cent in one day was possible today, but it would likely be a more orderly process, said Wunderlich Securities chief market strategist Art Hogan.
“We have the ability to shut things down for a period of time and reassess and try to ascertain what is the best way to get back in business and take a calmer look at things,” he said.
In response to the 1987 crash, the US Securities and Exchange Commission (SEC) mandated the creation of market-wide “circuit breakers” that call a temporary halt to trading after the Dow declines 10, 20 and 30 per cent. Only one market-wide halt has been triggered since then, in 1997.
The circuit breakers were adjusted in 2012, lowering the thresholds needed to trigger a trading pause, with the Dow replaced by the S&P 500 stock index as the benchmark index.
Under current rules, if the broader S&P 500 index falls more than seven per cent before 3.25pm New York time, trading is paused for 15 minutes. If the decline continues once trading resumes, and it is still before 3.25pm, the market is again paused at 13 per cent. If the decline happens after 3.25pm, trading continues. But if the decline reaches 20 per cent, trading is suspended for the session, regardless of the time of day.
“The industry has come an awfully long way from ‘87,” said Larry Tabb, who heads capital markets advisory firm TABB Group.
“The regulators have done a good job at implementing rules that help the markets ensure that they stay stable at a time when there is not a reason for them not to be stable.”
Many of the current measures aimed at taming market chaos were implemented after the May 2010 “flash crash” when the DJIA careened nearly 1,000 points, around nine per cent, within minutes before mostly rebounding in a similarly short period.
The SEC approved a regulation in 2012 called “Limit-Up LimitDown” that prevents stocks from trading outside of a specific range based on recent prices, pausing trading in the stocks in question when prices run afoul of the bands.
The US regulator and exchanges were forced to readjust the bands again, and the reopening procedures for paused stocks, after a chaotic trading session in August 2015. Then, concerns over the health of the Chinese economy led to panicselling and a dearth of buyers, spurring a record intra-day drop in the Dow.
On that day, more than 1,250 trading halts in 455 individual stocks and exchange-traded funds spawned confusion that might have compounded the problem and led to some investors getting worse prices than they otherwise would have.
“Anything is possible,” said Empire Executions Inc president Peter Costa. “With the advent of computer technology and the speed at which that technology has transformed the market, it is very possible.”
The safeguards in place would likely prevent another 1987-style crash from taking place, but with the Dow hitting a frothy 23,000 points for the first time ever this week, and the advent of highspeed automated trading, some traders are not so sure.
“Could it happen, something similar to that?” said Rosenblatt Securities managing director Gordon Charlop. “Yeah. How will it pan out and what will be the outcome? That is why they play the game.” Reuters