Crash of 1987

The popular media is full of reminiscing about the crash of 1987, replete with touching stories about what people were doing at that particular time. This is our generations version of where were you when Kennedy was shot. So here is my story.

I was working for Olde Discount at the time. Olde was the 1980's version of the pre Internet, low cost discount broker where they charged $40 a trade, a level that would be laughable now of course. They had just opened a new office on Long Island, and I was the only broker in the office, fresh from Series 7 school. It was a frightful day watching just about every stock ticker go down, while contemplating that maybe I had chosen the wrong career.

The second part of the reminiscing stories ask whatever pundit happens to be on TV the question - Could it happen again? The usual answer is no, because of "liquidity," and the regulation/circuit breakers that have been put in place since then. I will take the contrarian opinion, because, after all that is the point of this blog.

Yes, it could happen again. Liquidity is a specious argument. Liquidity can evaporate in an instance, as we saw over the Summer. Liquidity is there until its gone. There is nothing magical about it. It's like saying that humans can breathe because the earth has an atmosphere that contains a Nitrogen/Oxygen mix. Well, duh.

The second argument is also flimsy, as circuit breakers, while closing the market for various amounts of time, can actually accentuate the panic as sell orders queue up with nowhere to go. Also, more volume trades off the exchange now than in 1987 so the "market" will really not close at all.

I would say that it is not very likely that it will happen again.