The Crash of 1987 and today

By: Ray Pellecchia

File Under: Liffe derivatives, NYSE, NYSE Arca, Options

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Investors see ingredients of Black Monday in today's markets; Still the stock market is a dramatically different place today (Associated Press via Austin Statesman) Excerpt:

NEW YORK — "We who are about to die salute you."

A wary Art Cashin heard this phrase in its original Latin — morituri te salutamus — from a fellow trader and student of the classics early on a day 20 years ago that would earn the ignoble title Black Monday and serve as a lesson about the fragility of rising stock markets.

Cashin and his colleagues recall Wall Street's plunge of Oct. 19, 1987, when the Dow Jones industrial average fell 508 points, or nearly 23 percent, as one of the most frightening days ever in the stock market. Decades later, the crash helps put into perspective market drops seen more recently, including the 416-point, or more than 4 percent, skid in the Dow this year in February.

The Oct. 19 drop occurred when Wall Street faced many of the same conditions it faces today. The late summer months of 1987 saw stocks charging to fresh highs as well as an anemic dollar, rising oil prices, a weak housing sector and credit market jitters.

John Phelan, chairman of the New York Stock Exchange at the time, recalled, "The market was just too high, and it was looking for some excuse to react."

Indeed, the Dow had been up 18.5 percent for the year the day before the crash and at its late-August peak had risen a staggering 43.6 percent for the year. Some observers have made comparisons to this year, when the Dow crossed 13,000 for the first time and then passed 14,000 in short order as investors looked past growing concerns about tightening credit markets and a faltering housing sector.

But market watchers say there are important differences. ...

Next Black Monday Could Be an E-Crash (Associated Press via Houston Chronicle) Excerpt:

NEW YORK — There were more people than computers on the floor of the New York Stock Exchange on Black Monday. Twenty years later, there are more machines -- an evolution that's still hard for some traders to accept.

Traders can point out, with an almost painful nostalgia, where they were amid the chaos of Oct. 19, 1987. They recall screaming out sell orders in front of packed trading booths as the Dow Jones industrial average began its nearly 23 percent plunge.

Since then, the NYSE has been radically changed by modernization. Traders now find themselves huddled around computers that silently do the work for them, churning out thousands of trades per second.

"You can't feel or see the trades, you don't hear the level of the room," said Michael Rutigliano, a longtime NYSE broker who is now director of floor trading for W.J. Bonfanti Inc. "If there was another crash on an electronic exchange, it would happen at lightning speed. It would be like getting shot between the eyes."

Indeed, the question about how a modern exchange will be able to handle a steep drop like the one 20 years ago hangs over those that were there to witness it. Of the 1.8 billion shares traded on an average day, 90 percent are completed by a computer and 10 percent by human.

OK, enough Crash for now. Another bit of news:

NYSE Euronext Set to Link Derivative-Trading Systems (WSJ.com/eFinancialNews.com) Excerpt:

The European and U.S. derivatives arms of NYSE Euronext are to link their trading systems next year, enabling European institutions to trade directly with a U.S. options exchange for the first time.
Liffe, the London-based derivatives exchange owned by NYSE Euronext, plans to go live with a trading link to its U.S. counterpart, the NYSE Arca platform, in next year's first quarter. ...
The exchanges have been working to integrate Liffe.Connect and NYSE Arca by developing a fixed link between the two that allows users of one system to trade with the other through their desktop.
The integration of the two systems is expected to lower costs and create new opportunities for members, a key selling point of the Euronext-New York Stock Exchange merger, which closed in April. Fraser Cowie, the executive director of trans-Atlantic business development at Liffe, said linking the systems makes sense as there is little overlap between the customers trading on the separate platforms.

Today in NYSE History
18 Oct 1917 Former president William Howard Taft urged Americans to buy war bonds at a Liberty Loan rally held on the trading floor.

And a bit ironically, On This Day in 2006, the Dow Jones Industrial Average passed 12,000 for the first time before pulling back to close at 11,992.68.

Also today, Chuck Berry, rock 'n' roll's master poet and propulsive guitarist, turns 81. Hail, hail!