U.S. Financial Markets No Safer From Crash Risks, 25 Years Later

Friday marks the 25th anniversary of the Wall Street crash known as Black Monday, and U.S. financial markets are not much safer from a similar event that could lead to major losses for investors.

On Oct. 19, 1987, the Dow Jones Industrial Average fell 508 points to 1,738.74, or 22.6 percent, the largest daily percentage loss for the index--that's roughly equal to the Dow falling 3,000 points today. A record was set at the time of over 600 million shares traded.

At the time, Ronald Reagan was president, the Cold War was in full swing and Americans feared the U.S. economy was softening after a strong run-up. Academics have a variety of theories of what caused the major stock sell-off that day, including an over-reliance on automated computer trading and skittish investors.

Today, the majority of trading is computer-driven.

Before Black Monday, investors feared that the growing U.S. trade deficit, blamed in part on Japanese exports, would lead to a further decline in the nation's manufacturing sector.

"Something that minor pales in comparison to economic issues today," said Jim Sinegal, director of financial services research for investment ratings firm, Morningstar. "The Europe situation is somewhat unresolved. Something of that nature could definitely cause a panic among investors."

While some stocks like Apple (NASDAQ: AAPL) are near all-time highs, the major averages all all down this week.

Scott Brown, chief economist with Raymond James, said a number of uncertainties, including the U.S. election and the fiscal cliff are other uncertainties for investors.

"The Fed is doing already everything it can and fiscial policy is dead in the water with lawmakers discussing reducing the budget deficit rather than providing any stimulus at this point," Brown said.

Jason Weisburg, managing director of Seaport Securities Corp., said investors are no more protected from a similar panic than they were 25 years ago.

"You're always at risk when you're in equities," Weisburg said. "It doesn't matter whether you have humans or computers. There's an inherent risk in owning stock."

After the 1987 crash, maximum daily trading limits and circuit breakers were established by the stock exchanges to help cushion volatility and halt trading where's there's a flood of sell orders.

But stocks have had major movements due to faulty computer trading since then.

During the Flash Crash on May 6, 2010, the Dow dropped 1,000 points in minutes.

On Aug. 1 of this year, Knight Capital Group trading company lost $764.3 million due to a faulty computer program that led to a wave of erratic trades.

Weisburg said the best way investors mitigate risk from fluctuating markets and panic is by carefully diversifying your portfolio.

"They can hedge their portfolios with the myridad of products that are out there today," Weisburg said.

But he adds, "never say never."

When asked if U.S. regulators have assisted in safeguarding the U.S. economy or financial markets, Weisburg said they are "well intentioned but we're now in an overregulated environment."

"I think some of their actions have been helpful but some of them are misguidead, and they're reactionary and not proactive," he said.

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