Those of you who were in business ten years ago remember the pressure for regulation of the stock market after Black Monday’s 22.6% drop on October 19, 1987.
Erstwhile presidential candidate Jesse Jackson said that if YOU the people had the wisdom to put HIM in charge, he’d close the markets when they dropped sharply. In his words, he would be “Action Jackson.” But there were also widespread calls in less radical circles for regulation to prevent “panic selling” in future market downturns.
The “reforms” which halt trading when the stock market is falling sharply were instituted long ago, but didn’t come into play until yesterday’s market plunge. The new rules, adopted under pressure from Congress, require that trading halt once the market declines to certain levels in intra-day trading.
So how did the regulations work?
The simple answer is that if you lost money in the stock market yesterday, you probably lost MORE because of the enforced trading halts.
The stock exchanges opened down and selling was continuous, but the selling was characterized by traders as being an orderly, not panicked, sell-off. And the sellers were primarily sophisticated institutions such as pension funds and insurance companies — not frenzied individual investors.
All day — from the market’s opening until 2:35 in the afternoon — the market moved steadily downhill. When a 350-point decline in the Dow Industrial Average had been reached, the mandatory “circuit breaker” rule went into effect, requiring the stock market to close for half an hour.
Did this enforced halt have the effect of calming the markets and allowing crazed market participants to regain some perspective, as intended? No indeed; in fact, just the opposite.
When the market reopened at 3:05 what had been an orderly sell-off became a free fall, with the Dow losing 200 points within 25 minutes. Sellers, fearing that the chance to sell was limited, rushed for the exits.
The sellers were right — their opportunity to sell WAS limited. Once the additional 200 points were lost another mandatory closing took place, because the Dow was then down 550 points for the day.
As consultant Bert Ely said, “These breakers are unhealthy in the sense that they reinforce to people that even U.S. markets can become even momentarily illiquid.”
Even after yesterday’s debacle the market is still up 11% in 1997. However, if the government and regulators keep trying to help we could have a real bloodbath on our hands.
Sources:
The Washington Times.
The New York Daily News.
For continuing coverage of the stock market’s gyrations we also recommend:
