Black Monday echoes as computers fail to restore confidence

A quarter century after the worst one-day stock crash in history, measures to prevent a repeat are failing to keep investors from losing confidence in the market.

The 23 percent plunge in the Dow Jones Industrial Average on Oct. 19, 1987, came amid signs of a slowing economy, the threat of higher taxes and concern among individuals that trading was rigged for insiders. Today’s investors have pulled $440 billion from U.S. equity mutual funds since 2008 and sent trading to the lowest levels in at least four years, retrenching after the worst financial crisis since the Great Depression and the May 2010 stock crash, data compiled by Bloomberg and the Investment Company Institute show.

While Procter & Gamble Co. and McDonald’s Corp. are up more than 800 percent since 1987, protections adopted after the crash couldn’t stop unharnessed computer trading from erasing almost $900 billion of value in less than 20 minutes on May 6, 2010, based on data compiled by Bloomberg. E.E. “Buzzy” Geduld, 69, who oversaw about 60 equity traders 25 years ago at Herzog, Heine & Geduld Inc. and now runs investment firm Cougar Trading LLC, says crashes happen when investors become convinced they’ve lost control.

“In 1987 everybody tried to go to the exit at the same time, but the exit door wasn’t big enough,” Geduld said in a telephone interview. “You had literally a panic. Fast forward to 2012. The volumes we can handle are gigantic, but the exit door hasn’t changed in size.”

Abandoning Stocks

Individuals are abandoning stocks even after U.S. Federal Reserve Chairman Ben S. Bernanke held interest rates close to zero for a fourth year, valuations for the Dow remain 23 percent below the level at the market peak in October 2007, and exchanges installed safeguards following the so-called flash crash in 2010. U.S. stocks are in the 44th month of a bull market that has restored $9 trillion in share value, data compiled by Bloomberg show. The Standard & Poor’s 500 Index has more than doubled since March 2009 and is up 15 percent in 2012.

Average daily volume for U.S. equities was 6 billion shares in the third quarter, the lowest level since at least 2008 and about half the 10.9 billion average in the first three months of 2009. The total has decreased for 12 of the last 13 quarters as investors pulled money from American stock mutual funds for a record fifth year, according to data compiled by Bloomberg and Washington-based ICI.

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