Quote from limitdown:
The crash of 1987 October for equities began earlier that year. In 1987 April, the Bond market crashed. Major clearing systems and clearing firms were flooded with tickets and trades and under capitalized accounts to the extreme. I can't say which firm I was consulting at during that time, however they represented a huge percentage of the retail and professional marketplace. They literally shut down (controlled slow down, almost like the terms used in labor strikes).
Simply put, during the late 80's the concept of Portfolio Insurance was used and sold liberally to all these Instutional firms, Pension Funds, Banks, Brokerages and Retail accounts. Buying Put Options (swaptions, caps, collars, floors, etc.) as well as trading futures and large basket futures (at that time the S&P500 and other associated baskets were new) to protect their holdings became a secondary marketplace of its own. In fact the trading volumes and the value of the trades exceeded the collective amounts of their combined underlying equities and positions.
Under the weight of these "insurance" contracts exceeding their underlying obligations the swings and whips became fast and furious. In short, the mixing bowl threw more batter outside the bowl than remained. Once others began to realize that even the insurance mechanisms needed re-insurance the feedback loop started and cascaded into a full scale sell-off.
In short terms, some older, wiser Depression Era Senior Officers decided that they should unwind everything and take trades and money off the table. Quickly the electronic boards lit up with more sale orders than the floor traders would have ever expected. They folded within one - two days time, and there went their insurance. Simply put someone has to write the Put contract, in order for someone to purchase it. When they're no longer around, well you see how the collapse began and cascaded downward.
Get it in writing, which will never be tendered, else wise seek to "self direct" your 401K, uh, 201K, uh 101K.
