NEW YORK (Reuters) – On the 30th anniversary of the 1987 stock market crash, U.S. stocks are at a record high and investors are worried that steep valuations could indicate a correction is overdue, in spite of healthy corporate earnings and economic growth.
But could a recurring of “Black Monday” occur today? Modern trading technology, changes to the way stock exchanges function and in the way investor funds are managed should make a repeat of the 1987 crash less likely. Yet cautious traders decline to rule it out.
“We have learned a lot from the mistakes of the past in terms of the reaction or over reaction,” stated Ken Polcari, director of the NYSE floor division at O’Neil Securities in New York.
On Monday Oct. 19, 1987, subsequent large declines on Asian and European markets the previous week, the Dow Jones Industrial (.DJI) Average plunged 508 points, or 22.6 percent, for the biggest-ever single day decline in percentage terms by the blue-chip benchmark.
A decline of up to 20 percent in one day is probable today, but it would most likely be a more orderly process, stated Art Hogan, chief market strategist at Wunderlich Securities in New York.
“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 explained.
In reaction to the 1987 crash, the U.S. Securities and Exchange Commission mandated the development of market-wide “circuit breakers” that call a temporary stop to trading after the Dow declines 10, 20 and 30 percent. Only one market-wide halt has been activated since then, in 1997.
The circuit breakers were modified in 2012, lowering the thresholds required to induce a trading pause, with the Dow replaced by the S&P 500 stock index (.SPX) as the benchmark index.
Under present rules, if the broader S&P 500 index falls more than 7.0 percent before 3:25 p.m. New York time, trading is paused for 15 minutes. If the decline proceeds once trading resumes, and it is still before 3:25 p.m., the market is again paused at 13 percent. If the decline occurs after 3:25 p.m, trading continues. But if the decline gets to 20 percent, trading is halted for the session, no matter what of the time of day.
“The industry has come an awfully long way from ’87,” stated 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 mayhem were implemented after the May 2010 “flash crash,” when the Dow Jones Industrial Average careened nearly 1,000 points, around 9.0 percent, in a matter of minutes before mostly rebounding in a similarly short period.
The SEC authorized a regulation in 2012 called “Limit-Up Limit-Down,” which stops stocks from trading outside of a specific range depending on recent prices, pausing trading in the stocks in question when prices run afoul of the bands.
The U.S. regulator and exchanges were pushed to readjust the bands again, and the re-opening procedures for paused stocks, after a topsy-turvy trading session in August 2015. Then, worries over the health of the Chinese economy led to panic-selling 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 created confusion that could have compounded the issue and led to some investors getting worse prices than they normally would have.
“Anything is possible,” stated Peter Costa, president of Empire Executions Inc in New York. “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 in all likelihood avoid another 1987- style crash from taking place, but with the Dow hitting a creamy 23,000 points for the first time ever on Wednesday this week and the introduction of high-speed automated trading, some traders are not so sure.
“Could it happen, something similar to that?” inquired Gordon Charlop, a managing director at Rosenblatt Securities in New York. “Yeah. How will it pan out and what will be the outcome? That is why they engage in the game.
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