“The stock market careened downward yesterday,” reported The Wall Street Journal on May 29, 1962, “leaving traders shaken and exhausted.” The Dow Jones Industrial Average fell 5.7% that day, down 34.95, the second-largest point decline then on record.
“The drop took place on volume so heavy,” added the Journal, that the “ticker wasn’t able to finish reporting floor transactions until 5:59 p.m., two hours and 29 minutes after the market closed.”
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Interesting article in this morning’s WSJ on the “market break” of 1962. In 1961, stocks had risen 27%, and then, apparently without warning (who is in charge of those warnings, anyway?), stocks “broke.”
The 1962 WSJ reported that some stocks fell all day, while others just snapped. IBM (prior close, $398.50) fell from $375 to $365 on four downticks in two minutes, fell to $360 moments later, before bottoming at $355. That was a 5.3% drop in 19 minutes. In December 61, IBM was trading at $607. Smaller stocks fell harder. Brunswick Corp. fell 22.3% from its opening price.
The article in today’s Journal points out that some of the parallels between the two flash crashes are uncanny:
“In 1962, high-frequency trading didn’t exist, but “specialists” did. By law, specialists were obligated to try to maintain a fair and orderly market for each stock on the floor of the exchange. However, concluded the SEC’s report, “At no time during the day did the specialist intervene in sufficient volume to slow the rapid deterioration of the market in IBM.”
Makes me wonder if specialists would really have stopped the May 6 crashette . . .
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Source: Back to the Future: Lessons From the Forgotten ‘Flash Crash’ of 1962 JASON ZWEIG WSJ, May 29, 2010 http://online.wsj.com/article/SB20001424052748703957604575272791511469272.html
“What, me worry”? still operating in the Alfred E Newman mode of financial regulation
well, actually we do worry but thats about it
Guess you can’t blame HFT on that one. On April 27, 1987, also pre-computer trading, silver dropped from $11 to $7 and back up to $8 in just a few minutes. When humans and their emptions are involved anything is possible and “normal”.
When it comes to the stock market there is nothing new. Folks just like/need to think that their times/solutions/interventions are unique and necessary. Ignorance is bliss until the cliff.
It’s in the psychology of herds. Groups of people become a herd– taking subtle cues from each other, leading to mass collective actions that the infrastructures of markets aren’t designed to handle. The only way to prevent the occasional panic or euphoria that afflicts such herds would be to prevent communication among its members, which would pretty much destroy the whole reason for a market’s existence in the first place.
No offense – but aren’t you making a “causality error” here? Just because there was a market crash in ‘62, there is no inductive logic that these newer market mechanisms aren’t an issue in themselves provoking the same historical outcomes via new routes. I don’t see anything as being “absolved” of blame yet.
“Makes me wonder if specialists would really have stopped the May 6 crashette . . .”
Make me wonder what the motivation was for WSJ to print the story.
50 years guys… we’re talking apples and oranges here. Market volume, velocity and participation were all vastly different then.
@ Tarkus – Quite agree, you nailed it. . .
Tarkus, jpmist: i think you’re mistaken: “causality” error would be if Barry said “the market crashed in 1962 and there was no HFT back then, therefore HFT didn’t cause this crash”
that’s not what Barry said. What Barry said is that specialists, just like they didn’t prevent the 1962 crash, wouldn’t have prevented the 2010 crash, which is quite correct, although specialists would have prevented 1c prints in ACN.
you can’t legislate away market crashes. it’s impossible – regardless of who is in the middle of the market.
Interesting piece of history I hadnt heard before, thanks for sharing…
Nothing new under the sun, I heard.
@KidDynamite – I agree. I suppose I was directing my comment more at the specious inference in the article or prior comments, not BR’s (which I agree with). The 5/6 crash is usually discussed in context of HFT, and the connotative message in the article is duplicitous in its indirect assertion.
Nobody can arrest a crash. It’s happened plenty of times before and it will happen again. Indeed I-Man, “there is no new thing under the soon.”
Unlike commodity futures where there is an equivalent number of longs and shorts, there are no “shorts” for stocks (there are some but it’s miniscule compared to the long positions), so that’s why stocks can just vacuum down–everyone is long.
I was a teenager then but wasn’t that the time when people were building backyard fallout shelters? I know now that JFK was having great fun with Marylin Monroe as well. There was also that fellow from the CIA, Dulles, who was really pissed at JFK because JFK had canned Dulles over the Bay of Pigs disobedience of a direct presidential order. JFK is on record to have been planning the demise of the CIA at this time. Remeber the CIA is THE spear carrier for American corporate interests in foreign countries. Could there have been some panic in the corporate community over CIA difficulties? Whatever, after November of 1963, aside from a weak letter by Truman (the dude who started the CIA) about “downsizing” the CIA, the “difficulties” for the CIA ended.
Well, it’s water under the bridge now.
[...] Markets have always been messy: lessons from the flash crash of 1962. (WSJ also Big Picture) [...]
> Makes me wonder if specialists would really have stopped the May 6 crashette . . .
Of course they wouldn’t have.
In the face of a gigantic wave of market orders (many of which were stop loss orders), no person or machine will stand there waiting to get run over.
Beyond their own financial imperitave of getting out of the way during crashes, there are also limits on how much liquidity a market maker can add during a period of intense volatility, because they have margin requirements that preclude them from adding to positions ad infinitum.
When the SEC looked at the top 10 liquidity providers and how they performed on May 6th (see page 27 of their report, which is the 29th page in the PDF http://www.sec.gov/sec-cftc-prelimreport.pdf), they found that during the critical period after 2:40PM, those 10 firms were adding more liquidity than usual… however, it clearly was not enough
Given the volume of market orders – I highly doubt that there was enough excess margin capacity to have absorbed all of the market orders with well placed contra-side trades, and I suspect noone who is railing against HFT and how they performed on May 6th believes that they should be free of limits on their activities governed by margin requirements.
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"Law professors were never like economics professors," a Harvard Law professor told me. "If you disagreed with someone, you didn't call him a fool." "”Calvin Trillin, "Harvard Law," The New Yorker, March 26, 1984, p. 54.
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