A 1000 point drop in a day?

C

craigs21

Were you around in 1987? I worked for Quotron at that time and had a couple of desktops in my office. I was trading OEX options. I watched the 500 point drop unfold in front of my eyes. You couldn't get good quotes to trade on. It was a black hole.

The Dow was about 2700 at the top and that Monday fell from about 2200 to 1700. hmmmm. Let's see, divide 12100 by 2200 and we get 5.5. Multiply 500 by 5.5 and we get 2750. That is how much we would have to go down in a day to match the 1987 panic.

We probably won't have another day like that again because our electronic markets can handle more and will show somewhat good quotes under heavy load. That will keep people from going into a panic because they think everything is going to zero.

I do think we can see a 1000 point drop and we may see it this year.

Could we have another panic like 1987? Is there any circumstance where we would not have access to good quotes?
 
Quote from craigs21:

Is there any circumstance where we would not have access to good quotes?
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What's a good quote? Do you think you get good quotes now? Only market makets and specialists enjoy good quotes. Everyone else gets bad quotes.

Bill
 
Quote from intradaybill:

What's a good quote? Do you think you get good quotes now? Only market makets and specialists enjoy good quotes. Everyone else gets bad quotes.

Bill
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this is true. with recent volatility there were days when IB quote were clearly messed up for ~1 hour or so. and we have not even dropped 1000 pts :p
 
The most the ES futures can drop at any given time is 70 points before they are halted. 1987 won't happen again, or should I say "shouldn't" happen again.

Quote from craigs21:

Were you around in 1987? I worked for Quotron at that time and had a couple of desktops in my office. I was trading OEX options. I watched the 500 point drop unfold in front of my eyes. You couldn't get good quotes to trade on. It was a black hole.

The Dow was about 2700 at the top and that Monday fell from about 2200 to 1700. hmmmm. Let's see, divide 12100 by 2200 and we get 5.5. Multiply 500 by 5.5 and we get 2750. That is how much we would have to go down in a day to match the 1987 panic.

We probably won't have another day like that again because our electronic markets can handle more and will show somewhat good quotes under heavy load. That will keep people from going into a panic because they think everything is going to zero.

I do think we can see a 1000 point drop and we may see it this year.

Could we have another panic like 1987? Is there any circumstance where we would not have access to good quotes?
More...
 
As I recall hearing it explained, the crash of '87 was a feedback loop that got out of control. Major fund managers subscribed to a mathematical theory of "portfolio insurance" that allowed them to (theoretically) limit downside potential in their portfolios by selling index futures to hedge the risk whenever the portfolio value decreased by a set amount. The downturn got started by fundamentals, but soon began to feed off of itself. As the index futures fell, arbitrage programs took advantage of the difference between the price of the futures and the price of the corresponding stocks. This drove stocks down further, leading to more selling of index futures, thus creating the feedback loop. The effects were mainly limited to the market itself; the overall economy did not suffer anywhere near as severely as the crash in stocks would have predicted.

I don't think people subscribe to the theory of "portfolio insurance" anymore, so it is unlikely that the same feedback loop exists today. Of course, that's not to say that there might not be another type of feedback loop, that has yet to be discovered, and could produce a similar effect.

If a feedback loop drives a crash, the overall economy will not suffer severely. If a drop in the market is instead indicitive of an unhealthy economy, the drop in stocks is more likely to be a slow, steady downward fall, as occurred in 2001-2 when the economy suffered along with the stock market.
 
"Portfolio Insurance" was called dynamic -hedging and it was created by the academics at Leland, OBrien, and Rubenstein. I seem to recall that Kidder Peabody was used as an "agent" to execute such a hedge.

In theory ( on a blackboard ), it worked.
And at the time, about $70 Billion in assets was tied up in such "insurance" programs.

But the theory did not take into consideration "deep-discounts" and the slippage associated with such discounts in the S&P Futures due to market psychology/sentiment quickly turning negative.

I was a floor trader back then and the S&P went to incredible "discounts" acting as if the SPX was trading at 1100.

As a result, the hedges were "imperfect" because the futures were trading so far out of line with the cash index and its components.
 
"What's a good quote? "

A good quote is one that reflects the current market conditions and that you can use to make a trading decision. During the 1987 panic the market makers and specialists disappeared. What ever you saw on your screen could not be used for trading. It was delayed and lots of trades were not even reported. Part of the panic came from not knowing what your securities were worth. If you had a lot of speculative positions or were margined it was a nightmare. A lot of brokers were quick to put out margin calls and liquidated accounts if you did not put up new money that day. Some what similar to the 1929 panics.
 
Quote from ProfitTakgFool:

The most the ES futures can drop at any given time is 70 points before they are halted. 1987 won't happen again, or should I say "shouldn't" happen again.
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A similar drop like 1987 could easily happen today, why dont you think that could happen???


This market is on edge these last few months, Im actually surprised we haven't seen more than a single 500+ point drop in the market yet. This market can only handle so much and I think that so much is going to happen very soon.
 
Quote from S2007S:

A similar drop like 1987 could easily happen today, why dont you think that could happen???


This market is on edge these last few months, Im actually surprised we haven't seen more than a single 500+ point drop in the market yet. This market can only handle so much and I think that so much is going to happen very soon.
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Blah, blah, blah....
Do you ever provide any sort of factual evidence or market "history" as a way to substantiate your opinions/claims?
 
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