The 1987 stock market crash was mentioned to be one of the worst stock
market crashes in history and the biggest since the 1929 crash which led to the
great depression so what happened next was going to be vital.
Time magazine famously illustrates here that change is needed after such
a “wild week on Wall Street”.
Bruce Bartlett, a senior fellow with the National Center for Policy Analysis of Dallas said,
“What the 1987 crash ultimately accomplished was to teach politicians that markets heed their words and actions carefully, reacting immediately when threatened. Thus the crash initiated a new era of market discipline on bad economic policy.”
The market discipline mentioned involved reforms that were introduced to lower the volatility of stocks, options and index features. The first reform was the uniformity of the margin requirements.
New computer systems were installed in the stock exchange that only need
a single stroke to enter the trade instead of the 25 strokes required
previously. They minimised errors by rejecting trade if wrong inputs were made
which helped to manage data and reduce mistakes. They also maximised
productivity, accuracy and efficiency.
A major reform was introduced by the Chicago Mercantile Exchange and the
NYSE called the “circuit breaker”. This was revolutionary as it was designed to stop similar
major crashes from occurring again. It would stop operating in the two
exchanges for a period of time, to stop the panic selling or program trading,
if the Dow Jones was to fall by a certain level. If the Dow Jones was to fall
250 points then the market would close for an hour and would stop for two hours
if it fell 400 points.
These reforms turned out to be crucial as only a few years later in 1990
the bursting of the Asian bubble threatened to take down the American economy
as well but for the reforms introduced after 1987 crash as they stopped the
avalanche of program trading.
In December, 1987 a group of 33 economists met from various nations in
Washington D.C. and predicted that “the next few years could be the most
troubled since the 1930s”. Surprisingly though the Dow Jones was positive the
calendar year of 1987; it closed on December 31st at 1,939 having opened on January 1st at 1,897. It took the market nearly two years
to regain its closing high that was on 25th August, 1987 of 2,722.
This is my
final post, therefore I’d like to thank you for your time in reading this and I
hope that I have enlightened and educated you in some way.
All the
best,
James Eric
Stewart-Moore
http://www.investopedia.com/features/crashes/crashes7.asp#axzz1nsoykkNA
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