A Market Structure Unprepared for a Crash
Next Monday marks the fifth anniversary of the 1987 stock market crash. Given the current fragility of the market, most investors are wondering about a repeat. They ask: "Can the market still decline by 30% in four trading days? Can the value of U.S. stocks still decrease by a trillion dollars in the same period?"</br></br>The answer: You bet. This is not only because of the state of the economy, but because the post-crash structural reforms were incomplete, at best.</br></br>After the 1987 crash, both a presidential task force and the Securities and Exchange Commission looked at the market factors that permitted or encouraged 1987's precipitous decline. Their observations:</br></br>-- Separate and unequal regulation of stock index futures, options and securities was an important factor in the crash. The presidential task force recommended that one agency be made responsible for coordinating regulation of cross-market factors.</br></br>-- Computer program trading accelerated price movement in the crash.