The "flash crash" and its parallels to 1987
Wednesday, May 26, 2010 at 12:03AM 
WSJ story.
Investigators looking into the "flash crash" of 5/6/10 see a lot of similarities to the famous "black monday" crash of 10/19/87, the first one I ever really paid attention to.
The key bit:
On Oct. 19, 1987, the Dow Jones Industrial Average tumbled more than 20%, and the swoon extended into the following day, before a rebound. Floor traders, working by telephone, dominated the action and computer-generated trading was still in its infancy. Dark pools and high-frequency trading were the stuff of science fiction. Trading reached 600 million shares, according to the SEC.
Fast forward to May 6, 2010: The worst part of the lightning descent lasted roughly 10 minutes and the decline hit 9.8% at its worst. Trades, many executed in milliseconds, reached 19 billion shares.
In both cases, troubles first appeared in the stock futures market, which precipitated a decline in the regular "cash" market. The two created a feedback loop, dragging both markets lower.
Perhaps the most concerning parallel was how professionals abandoned the market. In 1987, some human market-makers on the floor of the exchange stopped providing bids for certain stocks.
Two decades later, in a market dominated by technology, high-speed traders who often provide liquidity for the market, just switched off their computers. Other big players, including fast-trading hedge funds, also pulled out of the market, according to traders and exchange officials.
We are told that the trigger for 5/6 remains unclear.
Percentage-wise, 10/19/87 was a much larger final drop of 23%. The 5/6/10 drop was only 9% at the low point (points-wise, the 999-point drop was bigger than the 508 lost in 1987, but the market's much higher now) and ended up only 3% down at close.
The big scare this time was all the electronic trading that made most of the plunge happen in 10 minutes.
Major lesson seems to be (for now):
Technological advances have been widely touted as having made the market more efficient--and more resilient. Instead, the May 6 plunge showed that technology mainly served to speed up trading and magnify the market moves.
Short answer: human behavior is still the big driver (the pull-out mentality that is natural enough), but when combined with electronic millisecond trading, the emotion is turbo-charged, suggesting that whatever we've got for circuit-breakers now isn't enough.
Reader Comments (1)
Should we be surprised that when we use computers to automate our thought/action processes that aspects of our mental perspectives also slip in to the system?