From: dlb@sunloaf.dazixco.ingr.com (Dave Buehmann)
Subject: Re: Are we nearing another stock market crash?
Reply-To: dlb@sunloaf.dazixco.ingr.com
Organization: Dazix-Intergraph
Distribution: na
Date: Fri, 2 Oct 1992 18:15:58 GMT

In article <BvCHzx.5wA@news.cso.uiuc.edu>, acheng@ncsa.uiuc.edu (Albert Cheng) writes:
|> 
|> In article <1992Sep28.234714.10324@pony.Ingres.COM>, rion@Ingres.COM (Rion Cassidy (x3357) OGT) writes:
|> >It seems to me that there was a big concern about computerized trading
|> >back in the '87 crash and the steps were taken to prevent a similar
|> >situation from ever arising.  I don't know the specifics, but I was
|> >given the impression that there might be downturns, but never such
|> >huge one day losses ever again.  Any comments?
|> 
|> The "fix" is banning computer driven trading if the market (DOW?) index
|> drops more than 50 points that day since opening.  The threat gives the
|> fund managers second thought if they really want to panic and lose
|> their computer assist option.  But there is no ban against other
|> trading.  If the sky is falling, nothing can stop the stempade, except
|> closing the trading totally.  That may cool people off a bit, but it
|> can not stop oversea trading.  You may end up watching your investment
|> evaporate overnight.
|> 
|> Remember one fact: computers did not exist back in '29.  All you need
|> is ill informed greedy human for a market crash.  :-)

The 50 point "circuit breaker" was enacted partially to give fund managers
cause for second thoughts, but primarily to prevent computer program-driven
trades from propagating market imbalances (differences between equities and
indexes).  These program-driven trades make a bad situation worse and more
importantly, they make it worse VERY QUICKLY.

There are other "circuit breakers" that kick in if the Dow moves 100 points
and then again at 250 points.

The 100 point breaker has something to do with changing how/when orders are
filled, allegedly to give the "little guy" higher priority on trades.

The 250 point breaker is a temporary market close (1/2 hour, I think)
to give all the wild-eyed traders a chance to regain their sanity
(assuming they ever had any).

They also enacted a number of other laws, such as giving one or more people
(chairman of the SEC and/or the president, I forget which) more authority
to close the markets at their discretion if they perceive a need.  They
also tightened up requirements on traders... in '87 many traders refused
to do business on that day or subsequent days.  If they do that now, they
won't be doing business again for a LONG time.

I might be slightly off on some facts... there were a number of proposals
on the table at that time and I don't remember exactly which ones were
enacted and in which form.

With regard to comparisons with '29, the problem now is greatly compounded
by computers that let those greedy humans do much more damage in much less
time... Moreover, the greedy human acts without thinking... the computer
senses some market imbalance, tells the human what to do and the now
wild-eyed human blindly does what the computer says: PANIC, SELL, PANIC MORE,
SELL MORE.  My god, the computer must be right.

There were many other influences in '29, such as corruption and market
inefficiency that served to screw the small investor in other creative ways.


Dave Buehmann               Voice:    (303) 581-2318
Dazix - Intergraph          Fax:      (303) 581-9972
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