Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Next Stock Market Crash Will Be Bigger Than 1987 "Black Monday"

Stock-Markets / Financial Crash Oct 24, 2012 - 10:29 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Friday was the 25th anniversary of Black Monday. On October 19, 1987 the Dow Jones Industrial Average fell 508 points, or a mind-numbing 22.6%.

How bad was it?...

Let's put it this way, if it happened today the Dow would drop 2,965 points on the session to finish at roughly 10,158. You can imagine the depression.


Now you know why they call it "Black Monday," even though it occurred in a sea of red.

In absolute or percentage terms it was the largest one-day drop ever-- beating the 13.6% drop on the worst day of the 1929 crash.

But then again, the 1929 crash was caused only by human beings. The 1987 event, on the other hand, was largely computer-driven. Of such is progress made!

For British observers like me, Black Monday was memorable as being the first business day after the Great Storm, the first hurricane to hit the British Isles since 1703.

The relief at not having lost a third of the British Navy, which happened on the previous occasion, made Black Monday seem a minor hiccup. I actually bought some shares as the U.S. markets opened, and was delighted to see that they closed at a higher price than I paid!

There was also the satisfaction of hearing about a rather smug ex-colleague, who had received a large payout from the bank where we had worked (no such payout came my way, alas) and had invested it and margined 50% in the U.S. market.

Alas, blessed by Fortune though he was, he was awakened at 1:30 am London time by a margin call for $700,000. I always felt it was something of a fitting recompense for greed and creepiness to authority.

How the Market Crashed
Of course, those whose trading lives don't extend back to 1987 doubtless feel that it can't happen again.

Well, I have news for you....

The 1987 crash was mostly caused by a primitive computerized trading strategy called "portfolio insurance." The idea behind this was that investors could not lose too much money if they sold futures every time the market dipped, so that further dips would be matched on the short futures position.

This fallacy became very popular, so that by October 1987 tens of billions of dollars were managed in this way.

Needless to say, it didn't work. When the market started falling out of bed the computers started maniacally selling futures, which then traded at a discount to shares, causing arbitrageurs to sell shares to match the futures.

The result was an uncontrollable downward spiral, much more severe than had ever been caused by panic among merely human traders.

There was one saving grace: the computers of those days were very sluggish by modern standards, and the market makers were human, so the disaster proceeded at human speed, taking minutes or even an hour or so for each 100 point drop in the Dow.

Black Monday All Over Again
Needless to say, those limitations no longer apply.

There are very few human traders, and about 80% of trading volume in U.S. stocks is produced by computers trading with each other, within a time span of milliseconds.

Today, computers act as piranhas around large orders, front-running them and making it more difficult to trade in large size than it was 15 years ago. More dangerous, these high-frequency traders are able to place orders that disappear when they are hit, thus depriving the market of liquidity altogether.

That's how in the "flash crash" a couple of years ago stocks traded for $0.01 and $99,999.

All this speed and sophistication makes the system much more dangerous.

Even when humans are standing by, and want to pull the plugs out of computers, they physically may not be able to do so before trillions of dollars have been traded and hundreds of billions lost. Knight Capital, an obscure brokerage, lost $390 million in under a minute when it switched on its new computerized trading system a few months ago.

Theoretically the exchanges have loss limits which cut in when the computers go mad, limiting the losses in the market.

In practice, if the selling pressure is great enough, these may simply make it impossible to reopen trading, causing the markets to seize up altogether. That would make all the stocks on the U.S. markets illiquid.

Needless to say, that would cause all the banks systems, no doubt also computer-driven, to send out margin calls to all their leveraged investors. With no liquidity, financial collapse would be more or less inevitable.

Machines have increased human capabilities in all kinds of areas. One of those areas is in causing stock market crashes.

In 1987, machines pushed the frontier of crash size from 13.6% to 22.6%. This time, they are much more capable - and could push the size of the crash frontier much, much further.

Source :http://moneymorning.com/2012/10/24/the-next-stock-market-crash-will-be-bigger-than-black-monday/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in