That left many investors, brokers and traders utterly unable to execute orders. Mutual funds are organized to let investors turn their equities into cash at any time, in a hurry. Normal redemptions pose no problem for the funds, which are used to having purchases exceed redemptions. But consider the fact that mutual fund portfolio managers have in the past few years become the intermediaries for most American equity investors. Those managers are now among the largest buyers and sellers of securities, and what they do in the market has an immediate effect on security prices.
Many people think modern investors are patient enough to weather any storm.
But if investors tried to bail out of the markets in a downturn, this very behavior could trigger the worst. With their personal computers and touch-tone telephones, they place redemption orders in mass. Mutual funds are suddenly caught without the cash to handle the orders. Their inventory of stocks has been devalued by a market crash, and the funds' borrowing powers are strained or cut off. Normally if this pattern hit only a single fund, other funds would be there as buyers to snap up the inventory of equities.