'After Crash, NYSE Got the Message(s)'

By: Ray Pellecchia

File Under: NYSE

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After Crash, NYSE Got the Message(s); Exchange Raised Buy-Sell Capacity; Thain's Goal: 64,000 Per Second (WSJ.com) Excerpt:

When the stock market crashed in 1987, 20 years ago this week, the New York Stock Exchange's trading systems were paralyzed, overwhelmed by a deluge of sell orders. Since then, the NYSE and other markets have spent billions of dollars on technology to stay a step or two ahead of a galloping increase in trading activity.

Partly as a result, on the several occasions since 1987 where markets have been stampeded, the outcomes have been less dramatic. One of the biggest recent tests was in February, when the Dow Jones Industrial Average tumbled more than 400 points after a drop in the Chinese domestic market and a computer glitch in calculating the industrial average.

As the number of buy or sell orders soared, systems backed up and some investors were unable to complete trades until the next day.

The market soon recovered, but John Thain, chief executive of Big Board owner NYSE Euronext, got the message.

Mr. Thain immediately directed the exchange to double its capacity to handle buy and sell messages flowing through NYSE computers, which work alongside floor traders. "We hit levels we never imagined we'd hit," says Louis Pastina, NYSE's head of floor operations.

The NYSE was armed in February to handle about 17,000 messages per second from investors seeking to buy or sell shares. Back in 1987, Mr. Thain says, the NYSE's nascent electronic systems could handle only 95 messages per second, a figure the onetime engineering student calls "scarily bad."

I'm sure it was indeed bad at the time. It also has to be seen in historical context. In the pre-Crash times, many NYSE members didn't see the value or utility of spending millions of dollars on order-processing systems. Then-Chairman and CEO John J. Phelan, Jr. and his team had the foresight and leadership to force the issue and begin the process of automating the limit-order books, which at the time were, literally, paper books.

Only about half the books had become electronic at the time of the Crash; if even those were getting overwhelmed by the everybody-going-through-the-exit-at-the-same-time phenomenon of the Crash, imagine the difficulty of maintaining paper books amid the maelstrom. The Crash woke up those who had dragged their feet, and the rollout of the electronic books was accelerated and soon completed.

There have been several good pieces in the press in the last few days focusing on the Crash, and I'm trying to play catch up and cite some of them here. That includes the package of articles and video that the Journal has attached to the above article. The Crash was a defining moment in the careers and even lives of many people, and for my money, nowhere has that aspect been better captured than in Tim Metz's 1988 book, "Black Monday - The Stock Market Catastrophe of October 19, 1987". Highly recommended.

I mention catching up because this space has been quiet lately as I've had to focus on some other things. The main thing has been that my father has had a serious health problem, and the outlook is better on that now, thankfully, but for the past week or so I've found it hard to look at the blank page of my blog-entry system and think about anything else. I gotta tell you, it always feels a little weird writing personal stuff like that on this corporate blog, but there's something about writing a blog, even a corporate one, that lends itself to it, or maybe it's just me. I hope you don't think I'm playing on your sympathy -- "Hey, Bill, send that order to the New York, the poor guy's worried about his dad!"

Anyway, back to it today, and happily so.

Today in NYSE History (NYSE.com)
16 Oct. 1833 -- The NYSE's initiation fee for new members was raised to $150.

I'm sure that move was unpopular with traders, as fee increases always are, but it looks like it was a relative bargain at the time. According to an online calculator I came across, $150 in 1833 would be about $2,700 today.

Tags: New York Stock Exchange, NYSE, Crash of 1987, stock market history