By Andrew Beattie
When: October 19, 1987
The amount the market declined from peak to bottom: 508.32 points, 22.6%, or $500 billion lost in one day. The largest one-day percentage drop in history.
Synopsis: This was the crash that everyone expected but could not justify because of the work of the
The SEC, however, could take investors to the proper information but couldn't make them think. In the early '60s and '70s, investors looked not at the value of the company but at the appeal of its public image and the vernacular used to describe it. The following kinds of over-embellished company sketches would attract the public eye:
"Synergy Space-Bovubetribucs forges a new frontier in the introduction of organic entities into the ecosystem of the lunar-scape in order to promote greater synergy. This triumphant new paradigm will be enacted through a leveraged advantaged momentum initiator."
Even though these illustrations were vague, investors were infatuated with these companies, which somehow represented some higher idea. The SEC required companies to state explicitly that they had no assets or even a fighting chance at getting any, but investors continued to believe that the potential for these companies was limitless. This bullish attitude, despite frequent bumps and insolvencies, continued into the eighties when conglomerates and hostile takeovers were the golden children of a finance-hungry media. Under the math of the "new economy,"firms would grow exponentially rather than incrementally simply by picking up other companies,
The SEC was unable to halt the shady IPOs and conglomerations, so the market continued to rise unabated throughout the '80s. Even institutional investors and large mutual funds, increasing their dependency on program trading, began to adhere to the mantra, "if a stock isn't gaining big time, find one that is."
Then, in early 1987, there was a rash of SEC investigations into insider trading. For the most part, people were aware of the tendency of Wall Street to look out for itself, but the barrage of SEC investigations, rattled investors. By October, investors decided to move out of the crooked game and into the more stable environment offered by bonds or, in some cases, junk bonds.
As people began the mass exodus out of the market, the computer programs began to kick in. The programs put a stop loss on stocks and sent a sell order to DOT (designated order turnaround), the NYSE computer system. The instantaneous transmission of so many sell orders overwhelmed the printers for DOT and caused the whole market system to lag, leaving investors on every level (institutional to individual) effectively blind.
Market Crashes: The Asian Crisis
Herd-like panic set in and people started dumping stock in the dark without knowing what their losses were or whether their orders would execute fast enough to keep up with plummeting prices. The Dow plummeted 508.32 points (22.6%) and 500 billion dollars vaporized. Fortunately, the newbie chairman of the Fed, Alan Greenspan, was around to help fight off a depression by preventing the insolvency of commercial and investment banks. The market recovered, and some modest refinements were made, including a circuit breaker that cuts out trading programs if the market slides to a set level.
InsightsThe SEC has continued to make the market a safer place and to learn from and adapt to new scandals and crises.
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Financial AdvisorWant to make a good living taking on those renegade trading rascals on Wall Street? Here are some tips to help you get in the door at the SEC.
Financial AdvisorLearn about some signs of a potential stock market crash including a high level of margin debt, lots of IPOs, M&A activity and technical factors.
InvestingMarket tops and bottoms have proliferated the financial markets throughout history. Learn how countries dealt with these tough economic periods.
TechInvestigators are still trying to figure out what went wrong on May 6, but it seems likely that the crash was caused by multiple interlocking failures.
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InvestingThe SEC has released new liquidity rules for mutual funds aimed at reducing risk.