Technology amplifies human response, as the 1987 stock market crash demonstrated. On October 19, 1987, the Dow Jones Industrial average declined 22.6% in the largest single-day drop in history. “Black Monday,” as it has become known, was almost twice as bad as the stock market crash of October 29, 1929. The 1987 crash was caused in large part by the combination of technology and the herd-like mentality of investors. Program trading allowed automatic sell orders to be placed at preset prices, investors immediately responded by selling issues of their own, and then additional program trading kicked in to drive stocks even lower. The result was a vicious whirlwind that produced a financial meltdown in a matter of hours.

    In response to the 1987 crash the NYSE prohibited certain forms of program trading, and the SEC implemented “circuit breakers.” Under the SEC's rules, a drop of 350 points in the Dow would bring a 30-minute halt in NYSE trading. If the Dow declined another 200 points, trading would cease for one hour. The circuit breakers were needed to keep technology and the ability for rapid exchange of information in check. The markets mainline information each and every day, and the circuit breakers help to inoculate traders before an uncontrollable chain reaction can occur.

Program trading are transactions, usually computer-generated, that result in orders to sell huge amounts of stock under pre-set circumstances. At first this type of trading occurred when index funds and other institutional traders got on board with large-scale buying or selling movements or "programs" to spend in a method, which simulated a marked stock index. Today the phrase commonly describes, “computer aided stock market buying or selling programs, portfolio insurance, and index arbitrage.” Nearly half of the index arbitrage accounts for trading that involves the stock market and futures and options markets. In theory arbitrage is simply purchasing what is cheap and selling what is expensive for profit without risk. The largest parts of program trades in the United States are completed on the New York Stock Exchange, using computerized trading systems.

For example a portfolio manger will try to net gains from the price spreads between a selection of equities comparable or equal to those at the core of a designated stock index. One popular index that investors model at this time is the Standard & Poor's 500 Index. Rather than buying and selling one lot of stocks at a time the trading these stocks trades include the buying or selling of a “basket” that includes “15 or more stocks with a total market value of $1 million or more. “

Computerized trading programs can examine a large diversity of markets and securities designed for detecting indicators. When there is a match they issue orders to buy and sell. The New York Stock Exchange collects program trading statistics daily.

A common effect of this kind of arbitrage are the opportunities that crop up from the short term mis-pricing of securities on different exchanges. One example cited is, selling short stock index futures contracts on the Chicago Mercantile Exchange while at the same time the program buys a basket of securities mimicking the S&P 500 index on the floor of the NYSE. This is purposefully calculated to reap the benefits of the transitory disparity that is sandwiched between the actual value of the stocks that make up a “popular index and the value represented by futures contracts on those stocks.” To reduce to a bare bones explanation, if the stocks' worth are more than the futures contracts show, computer programs issue instructions to buy futures contracts as soon as they sell the stocks. When the value of the stocks are less than what the futures contracts show, the computerized program trading purchases stocks and sells the futures. The end result is practically risk-free earnings for the program traders. Because of the immense numbers of shares required to make the method work it burdens the market with an additional instability.

The computer is programmed to detect price discrepancies and enter the buy and sell orders directly into the market's computer system, which are automatically executed. Many are of the program trades are set in motion without human supervision or directions. These automated executions to buy and sell large numbers of stock have been blamed for excessive volatility in the markets, especially on Black Monday in 1987.


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As defined by the New York Stock Exchange, program trading involves the purchase or sale of a basket including 15 or more stocks with a total market value of $1 million or more. Most program trades are executed on the New York Stock Exchange, using computerized trading systems. Index arbitrage is the most prominently reported type of program trading. In a effort to try and monitor program trading, the NYSE keeps daily statistics of trading volume and how much of it is a result of program trading.

In an effort to keep the computers from running amok and launching an avalanche of sell orders on the unsuspecting traders that would decimate the market, certain things known as “circuit breakers” would kick in should the following circumstances occur.

If, in a single day of trading, the Dow Jones Industrial Average were to fall by 10%, the circuit breakers would kick in and trading on the floor of the Exchange is halted for one hour. I guess this is meant so that people can catch their collective breaths and calm themselves before the panic starts in. Naturally, if the Dow rises by more than 10%, no trading is halted since people are making money hand over fist and everybody goes home happy.

If the Dow were to fall 20% in a single day, trading would be halted on the floor for two hours. This is allow people time to make it up to the rooftops, say their prayers and jump into the arms of their maker. Again, should the Dow rise 20% or more, no trading is halted. You can plan your next vacation on your own time.

If the Dow was having a really bad day and dropped more than 30%, trading is halted for the day. This is to allow those contemplating suicide to wrap up any loose ends and get it done right. Once again, if it were to rise 30%, the game is still on and your retirement plans are still in intact if not flourishing. Buy that beachfront property, get yourself the new Porsche for this would considered by many to be the best thing that ever happened.

Naturally, all of these safeguards are in place for people and institutions that can afford to invest in the market in the first place. For the average schmuck who’s trying to eke out a living and lives paycheck to paycheck, they are probably meaningless.

Note: The circuit breakers responsible for halting trading we’re called into use for the first time on October 29, 1997. They were used twice during the day in order to try and stem the selling generated by program trading. The Dow wound up losing 554 points that day or about 7.2 percent of the total market value.

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