October 19, 1987 – Black Monday, 20 Years Later BACKGROUND On Oct. 19, 1987, “Black Monday,” the DJIA fell 507.99 (508) points to 1,738.74, a drop of 22.6% or $500 billion dollars of its value-- the largest single-day percentage drop in history. Volume surges to a then record of 604 million shares. Two days later, the DJIA recovered 289 points or 16.6% of its loss. It took two years for the DJIA to fully recover its losses, setting the stage for the longest bull market in U.S. history. Date Close Change Change % 10/19/87 1,738.70 -508.00 -22.6 10/20/87 1,841.00 102.30 5.9 10/21/87 2,027.90 186.90 10.2 Quick Facts on October 11, 1987 • DJIA fell 507.99 points to 1,738.74, a 22.6% drop (DJIA had opened at 2246.74 that day) o Record decline at that time o Friday, Oct. 16, DJIA fell 108 points, completing a 9.5 percent drop for the week o Aug. 1987, DJIA reached 2722.42, an all-time high; up 48% over prior 10 months o Today, DJIA above 14,000 • John Phelan, NYSE Chairman/CEO -- Credited with effective management of the crisis. A 23-year veteran of the trading floor, he became NYSE president in 1980 and chairman and chief executive officer in 1984, serving until 1990 NYSE Statistics (1987, then vs. now) 1987 Today (and current records) ADV - ytd 1987 (thru 10/19): 181.5 mil ADV – 1.76 billion shares (NYSE only) shares 10/19/1987: 604.3 million shares (reference ADV above) 10/20/1987: 608.1* million shares (reference ADV above) Oct. 19, 1987: 585,000 orders 155 million orders Oct. 20, 1987: 205,000 trades 10 million trades Oct. 20, 1987: 120,000 quotes 59 million quotes Oct. 20, 1987: Capacity of 95 messages 64,000 messages per second (by year- per sec. end) Number of listed issues: 2,244 2,784 Market Cap: $2.2 trillion $28 trillion (NYSE only) Dollar value 10/19: $21 trillion $106 billion (NYSE only) *More volume executed on 10/20 than 10/19 Miscellaneous Volume Facts . Total NYSE share volume for the week of October 19th was 2.3 billion shares – almost as much business as was done in all of 1967 . Record week ending October 23 --Dollar Value $75 trillion . Additional Volume Facts: o Oct. 28, 1997, NYSE’s first day over 1 billion shares o Current NYSE record volume 2.9 billion shares (without Crossing Sessions) Key Messages (Then and Now) . The NYSE under John Phelan, as well as other market leaders and government officials, got high marks for their handling of the Oct. 19, 1987 market correction and response. • Systems were stressed and overloaded, but performed; market did not shut down; • Specialists, while under stress, fulfilled their capital obligations (while others had no such obligations, some turned customers away). In years after, there were important changes/reforms enacted that improved our markets and help restore investor confidence, as evidenced by the historic bull market and the rapid growth of investor participation in the ‘90’s. • Lessons learned; changes made financial markets better • More technology and automation into our markets (ongoing investment), significantly more message capacity to handle rapid and significant increases in trading volume; initiatives such NYSE Integrated Technology plan and SFTI* . Note, 2007, NYSE spent $25 million for capacity upgrades • Communication, coordination, and contingency planning among markets, bankers and government, domestically and globally • Improved rules and regulation, including greater transparency and disclosure requirements; circuit breakers and other safeguards, and (by the SEC) new margin requirements in an attempt to lower the volatility of common stocks, stock options and the futures market * SFTI: The NYSE TransactTools Secure Financial Transaction Infrastructure (pronounced "safety") is a communications network dedicated to the financial industry. The highly reliable, resilient and low latency network offers connectivity to NYSE as well as other exchanges, market centers and content service providers and also connects to over 800 market participants including all of the National Market System markets in the United States. Twenty years later, financial markets are better equipped/more prepared to deal with major market dislocations and other crisis. Goal must be to keep marketplace open/accessible to customers/investors. • To some extent, the burst of the internet bubble several years ago, the events surrounding 9/11, and the recent mortgage credit crisis bear that out. Today’s financial marketplace, structurally, is markedly different from 20 years ago. • Now have a more competitive, more diverse, more global, more tightly regulated landscape with a variety of ways to execute trades and access liquidity. • However, on the scale of ’87, this new market structure has yet to be tested. • Specialists possess their market stabilization obligations; other markets don’t • Investors and all market participants have greater and faster access to important data and information. • While no one can predict the future, very confident that today’s marketplace would operate reliably, in such a way that would enable investors to confidently trade in a fair and orderly manner. Support– 20th Anniversary of Oct. 19, 1987 . NYSE and specialist system performed well, overall. Specialists more than doubled their buying stocks against the trend, adding liquidity and fulfilling stabilization requirements. o # of Specialist firms: ’86--54; ’87--55; ’88--52 . Systems were overloaded, tape ran late, but did not halt or shut market down. o Nasdaq market makers did not pick up phones (no obligation) o In some ways, the 20th was more challenging than the 19th, as major stocks trading all but halted. At the open, there were no buyers at any price until XMI futures began rebounding in late morning, then stocks began to rise slowly. Chairman/CEO John J. Phelan, Jr., received high marks for his calm, visibility and intelligent leadership of the NYSE during the 1987 market break; Phelan rang bell at close of day Oct. 19 . While it took awhile for markets to recover and to regain investor confidence, much was learned and there were new practices put in place to improve the marketplace. Today’s marketplace reflects those changes and improvements, which benefit investors and all market participants o Better coordination and communication among various market centers, regulators and other government agencies o Improved regulation, practices and policies put in place, like circuit breakers Support: On the causes of Black Monday • Interest rates were in the double digits, the dollar was plummeting, and it appeared global dominance might soon shift from the United States to Japan • Real-estate values were collapsing, savings and loans had just been looted by white-collar thieves, and junk-bond financed raiders were launching hostile takeovers of huge companies and putting thousands out of work • The stock market had become increasingly volatile, but there was nothing in the news on Oct. 19 that would warrant history's largest one-day percentage loss in the Dow - more than 500 points, akin to a 3,100-point drop today. • Program trading, in its infancy, is cited as the chief culprit. Some blame the advent of portfolio insurance - a loss-curbing strategy that doesn't work when everyone wants out • Some questioned the NYSE’s order handling system, which had some difficulty keeping pace with the sudden spike in sell orders. • Those who prefer a more rational explanation say it was a just a long-overdue correction; The exact causes of Black Monday remain a mystery Support: The NYSE Response . Shortly after 1987, NYSE began to develop what is now a rigorous technology/ communications systems upgrade and capacity planning process put in place o NYSE Integrated technology plan….computer systems were upgraded at NYSE and in other markets to handle larger trading volumes in a more accurate and controlled manner; new capacity model o Brokers had still been using pencils/paper, no hand-helds, etc. o Specialists--only half specialists had been using display book, others using paper books in '87; John Phelan soon after 19th required all to use Display Book . Circuit Breakers - The NYSE and the Chicago Mercantile Exchange introduced the concept of a circuit breaker. The circuit breaker halts trading if the Dow declines a prescribed number of points for a prescribed amount of time. Birth OCS -- Online Comparison System, need for firms to know on comparison basis; automated, used to be on paper . Margin Requirements - The SEC modified the margin requirements in an attempt to lower the volatility of common stocks, stock options and the futures market Curtailed Hours The NYSE’s people and systems were strained but performed well during the crisis, executing customers’ orders quickly and reliably. Nonetheless, in the weeks following October 19, the NYSE shortened its trading day to allow the financial community time to process the unprecedented number of transactions and to ensure that the comparison and settlement cycles would go smoothly. NYSE and member firm employees worked through the weekend to process the record-shattering volume. Fri., Oct. 23 – Fri., Oct. 30, 1987 2:00 pm close. Mon., Nov. 2 – Wed., Nov. 4, 1987 2:30 pm close. Thu., Nov. 5 – Fri., Nov. 6, 1987 3:00 pm close Mon, Nov. 8 – Wed., Nov. 11, 1987 3:30 pm close. Thu. Nov. 12, 1987 Normal hours resumed (9:30 am-4:00 pm) Support: Regulation & Rules/Improvements There was a view that deficiencies in operational systems, information transmission, liquidity, and clearance and settlement procedures affected the speed and size of the decline. On October 19, 1988, SEC approved a series of initiatives by the NYSE and the Chicago Mercantile Exchange to coordinate procedures between the equities and futures markets, including coordinated circuit breakers; a joint effort against front-running; inter-exchange communications; and shared audit trail and surveillance information.