20 years later, could markets crash again?

•Sharp downturns precede the crash. Selling cascades occur for a variety of reasons, including an inability to deal with losses, notes psychiatrist Ari Kiev. Fear is a trigger. "It gets scary when the market starts going down, down, down," says Kiev, author of the upcoming book Mastering Trading Stress. Uncontrolled emotions also amplify the need to get out. "The mind-set just changes dramatically. Catastrophic thinking occurs. People get in the mind-set of doom," he says.

The market had been sliding since late August, but it fell a total of 10% the three days before the crash. Says University of California at Berkeley finance professor Mark Rubinstein: "When those declines happened, there were a lot of people who started to think about it over the weekend who concluded, 'This is not the kind of market I want to be in.' "

•Financial innovation backfires. Institutional investors touted "portfolio insurance" as a way to immunize themselves from huge losses. In theory, offsetting positions in the futures market could keep your portfolio from getting clobbered. But in the chaos of the crash, many portfolio insurance schemes didn't work as planned. Instead, they acted as a trigger to sell when prices were in free fall, exacerbating the losses.

Can it happen again?

"A crash is a very rare event," says Richard Russell, editor of Dow Theory Letters. "The odds are always slim, but they do occur." The odds of a meltdown like Black Monday are long — but not as long as might be predicted by financial models, Hulbert says. A 2003 paper by professors Xavier Gabaix, H. Eugene Stanley, Parameswaran Gopikrishnan and Vasiliki Plerou, put the odds at once every 75 years.

Are there similarities between now and 1987? Sure; 1987 was also a pre-election year. Economists then were worried about an economic slowdown. In 1987, the dollar was weakening, and corporate deals were red-hot.

But the differences are far more important, Russell says. In October 1987, the Federal Reserve had just finished a round of rate increases that left the key federal funds rate at 7.50%. In contrast, the Fed cut the fed funds rate a half-percentage point, to 4.75%, last month.

What's more, many of the problems that fed the panic on Black Monday — overwhelmed trading systems, faulty communications and a lack of circuit breakers to halt trading — have been addressed in the past 20 years, says Richard Ketchum, head of regulation for the NYSE, who was head of market regulation for the Securities and Exchange Commission in 1987. "You have dramatically enhanced capacity, better technology, better communication," he says.

Today, average NYSE volume is 1.76 billion shares, vs. the then-record 604 million. Similarly, 585,000 orders were placed during the crash; today, 155 million orders are processed daily. By year's end, the NYSE wants to handle 64,000 order messages a second, vs. 95 messages in 1987.

Then there are the circuit breakers. The market stayed open all day on Oct. 19, 1987. Today, for a 2,700-point, or 20% drop, trading would be halted for two hours if it occurred before 1 p.m. and an hour if it happened between 1 p.m. and 2 p.m. The market would close if a 20% drop occurred after 2 p.m.

"The beauty of the circuit breakers is it gives traders time to take a breath and get a better understanding of what's going on," says Ketchum.

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