Addressing delegates at the annual meeting of the Swiss Futures and Options Association which took place at the resort town of Montreux, Switzerland, William J Brodsky, chairman and CEO of the Chicago Board Options Exchange (CBOT) said, “the co-ordination of exchanges, regulators and the New York Federal Reserve now playing a key role” sees the markets “well placed” as the 20th anniversary of the 1987 crash closes in.
In just one day - Monday October 19 1987 - the Dow Jones Industrial Average fell 508 points, or 22.6 per cent.
The events of ‘Black Monday’ were also applicable to London, Australia and Hong Kong exchanges, as rapid selling on Wall Street infected trading decisions across all time zones. “We were getting sell orders from Europe like we’ve never seen before,” said Mr Brodsky, who was then head of the Chicago Mercantile Exchange (CME).
But two decades on, and despite a backdrop of diminishing liquidity and volatile global market confidence, the conditions underpinning Black Monday have changed for the better, those familiar with the situation believe.
“We have a more diverse, effective capital base with respect to the financial players and risk management as an independent function is now established in the corporate world,” explained Richard Ketchum, CEO of regulation at the NYSE. CBOT’s Mr Brodsky added the concept of volatility “is better understood today”.
Mr Ketchum views the events of 1987 as the beginning of modern risk management and recognition of how quick credit problems could occur. “The clearing system is far better today and the focus now is to look at credit scenarios and work through them,” he said.
“Transparency with respect to credit worthiness had really dropped out in 1987 and your basic preconception with respect to value and how the markets worked had been challenged,” he added. “We were starting Tuesday morning at the edge of the cliff”.
Critics of the futures and options market, who argued the free-falling S&P Futures 500 index hastened stock price declines on the Dow, have since come to recognise the ‘shadow markets’ as integral to the system, and not separate entities.
Mr Brodsky explained: “In 1987, the stock exchanges looked down on derivatives as a kind of vermin…most people didn’t understand the innovation of the derivatives market and it was the scapegoat of the crash”. Today, the fastest growing part of the market is derivatives, he added.
John D Damgard, president of the Futures Industry Association, confirmed the ‘bête noire’ status the futures market had at the time: “We were the target over the crash…futures were not popular then and we had to kick down the door to see the Brady Commission”.
The Brady Commission called for the unification of clearing systems, regulation under one agency, and recognised futures and options, together with Wall St, as a single market. It also recommended the use of ‘circuit breakers’ to stop the freefall scenario witnessed on Black Monday.
The only time they have been used was 27 October 1997 - almost a decade to the day since the 1987 crash - when the Asian financial crisis triggered a 350 points loss in the Dow and the market closed for 30 minutes.
NM
