Then chairman of the New York Stock Exchange
The market had been strong all through the summer of '87, and everyone was talking about their stock portfolios. Even the painters on Long Island were talking about their real estate deals. You parked your car in the garage, and the guy had ten tips for you. Back about two years before, in a survey we found that firms were doing something called program trading, or portfolio insurance. Based on that, we accelerated our capacity so that we would be able to trade 600 million shares a day by '89 or '90. So all that was in place.
The Friday before Black Monday, the market did a lot of volume. I called around over the weekend, and Monday morning we called all the major firms in at 8 A.M. and told them we were in for some heavy weather and that we were opening all the switches early so they could route their orders in. No matter what, we were determined to stay open. After that meeting we sent our people to all the other firms to say heavy volume was coming and the switches were open to take orders. The morning was relatively uneventful. But when I returned from lunch around one o'clock, the market was off 180 points, and between then and four o'clock it melted down. The volume was 600 million shares - 200 million more than the theoretical estimated capacity of the industry.
On the 20th we had huge volume again, and at about 11 o'clock I went to the floor. It was reasonably quiet, but it looked like the stuffing was knocked out. Our way of handling the huge imbalance was not to shut down the market but to shut down individual stocks and re-indicate them, and when we got a decent indication, open them again. We did that with about 100 stocks. I went back to the office, and sometime between 12:30 and 1:30 the market was off another 125 points but then began to rally.
I'm not sure what I learned from it, other than there will always be excesses in the market. This could not have been prevented. When new products develop, like index arbitrage and portfolio insurance, I call it a mental oligopoly. There are a small number of people and firms doing it, and they had a monopoly on it for a certain period of time, and they certainly weren't going to tell the regulators. The market has to get some light and transparency, and it's very difficult with new products - like the whole subprime problem we see today.
