20 Minus 1

October 18, 2007

It is almost twenty years since the largest one-day stock market plunge in history. In honor of the momentous anniversary of October 19, 1987, I am devoting this entire week of articles to what led up to the crash of 1987, my personal memory of the week and day itself and what lessons we might be able to draw twenty years later as the Dow Jones Industrial Average and the S&P 500 Index are making new highs.

After a dismal previous week where stocks fell by 10%, on the morning of October 19, 1987, stock “portfolio-insurance” triggers engineered by computerized trading programs were about to start selling to limit downside losses for institutional investors. The dumping of stocks across the board began in Asian markets with Europe following suit. To add more drama to the day, two U.S. warships shelled an Iranian oil platform in the Persian Gulf. I stood in the gold options ring for the 8:20 AM opening, but kept a close eye on the action in the stock and bond markets.

Stocks started selling off from the opening bell and seemed to gain momentum throughout the day. The COMEX closed at 2:30 PM and before the end of the day, my boss ran over and screamed, “Everyone go home long—gold is going to be the only safe haven and after the stock market closes today, money will pour into this market!” Gold closed up approximately $10 that day at $481. Ironically, October 19th was my most profitable day of trading in my short time on the floor. I was able to trade in and out of positions, but to the great disappointment of my boss, I went home flat, not long. I did not mean to disobey him, but in the chaos, I had made a mathematical error, which left me neutral, not long. Luckily, he had to run over to the office to help out the stock trading desk, so I avoided his wrath.

At about 2:35 PM, my beeper rang (this was before cell phones) but I did not recognize the long series of numbers. As I dialed from the booth, I realized that I was making an international call. My father answered the phone to tell me that they were in the Rome airport, waiting to board a flight back to New York. He had touched base with his partner over the weekend and they agreed that it made sense to get back to work ASAP. Unfortunately, on a Sunday, nothing is ASAP in Italy! Never one to lose his sense of humor, he said, “Can you believe that it cost us $400 to hire a car to drive from Florence to Rome—oh well, it’s cheaper than having your mother shop for another week!” Without missing a beat, he said, “Listen honey, I want you and your sister to buy as much IBM and GE as you can in your accounts before the market closes today.”

I called my sister, who was an investment banker at a small boutique firm at the time. She handled the trades for me and then I joined a bunch of COMEX traders to watch the stock market until 4:00 PM. Trading was chaotic with frequent halts and delays due to huge order imbalances and system glitches. At the end of the day, the Dow Jones Industrial Average had plummeted an unprecedented 508 points (22.6%), leaving it at 1738.74. Volume hit 604.3 million shares, almost twice the prior record of 338.5 million set on October 16. Equally as noteworthy was the fact that the Dow had fallen over 36% since the August 25th high.

The press was already calling the day “Black Monday,” a term which one commodities trader noted had its original roots in the gold market. The original Black Friday was September 24, 1869, when a group of financiers tried to corner the gold market and precipitated a business panic followed by a depression. Subsequent panics affecting the financial markets were thereafter referred to as “Black” and the term continues to be used to this day.

To say that the events of October, 1987 shaped me is an understatement. It is rare that any professional investor learns the painful lesson of risk and reward so early in her career. In fact, while everyone had expected that gold would trade higher the next morning, it actually opened limit down (meaning that it dropped $25 before a trade was ever made!) My boss who insisted that we go home long was wrong and by chance, I was the only one of the group who did not lose money on October 20th, when gold closed the day down $16.70 at $464.30. Weeks after the crash, he was relocated back to Chicago and the six young COMEX options traders were left unattended as the firm had bigger issues to tackle at the time.

My father returned to New York with a big check in hand. He and his partners had given back a bunch of money that they had earned, but they were resilient—they were among the survivors who would return to their prior glory by the end of the year. But many were not so lucky. Fortunes were lost, businesses wiped out and all in a matter of days, weeks and months. One of the consequences of the 1987 crash was that trading rules were put in place to help maintain fair and orderly markets and to prevent future panics. But fear and greed, every investor’s favorite emotions, are always with us, so tomorrow I will talk about the lessons to learn from 1987 and discuss whether another crash could occur twenty years hence.