It was 20 years ago today

By: Ray Pellecchia

File Under: NYSE

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Memories of 1987 market crash (FT.com) Excerpt:

John J. Phelan Jr.: Someone from Berkley came in to have lunch with me in 1986 and he went over portfolio insurance and I said, my god, what you are talking about is a potential waterfall. We started a major upgrade of our systems in 1986.

I went down to the SEC and said the whole business of portfolio insurance and index arbitrage is a recipe for disaster. Some firms got grumpy as they were making money out of it. I commissioned a study in July 1987 and promised my board I would stop talking about it [portfolio insurance] as people who were using it and making a lot of money out of it did not like me talking about it.

Index arbitrage was being done by the major trading desks and firms taking advantage of the spread between futures and the underlying security. The rest of the world just did not understand it.

I did not anticipate a fall of over 20 per cent in one day or over 30 per cent in three or four days but I did anticipate the potential for a significant drop. ...

Of course, there's no shortage of Crash anniversary pieces today. Here are just a few:

‘87 crash heralded birth of electronic trading

The anatomy of a crash: What the market upheavals of 1987 say about today

20 years later, could markets crash again?

Me, I don't really have a Crash reminiscence. I was at a community newspaper at the time, mostly oblivious to what was happening on Wall Street. It's actually because of the Crash that I got my job; NYSE expanded the press department a bit to help deal with all of the media interviews and inquiries in the post-Crash period.

For the first time since 1929 the inner working of the market had been thrust onto the public stage. For a time, I think we actually made some progress in advancing public understanding of how financial markets work, and the roles of specialists and floor brokers in the process. Eventually, of course, public attention turned elsewhere. Specialists and brokers no longer seemed newsworthy, absent a fall in the market or a trading scandal. All of that undermined the cause of informed discussion years later, when regulators and legislators began re-examining the structure of the market and initiating the changes we are undergoing today.

I'd like to think that recently we've taken up the right path again, creating more transparency and conversation about what's going on here. I hope that the stronger flow of information helps build better understanding, relationships and trust in our marketplace.

Your thoughts are welcome, as always.