“Customers were calling and entering orders an hour earlier than usual,” said Polcari, who worked at William Latham & Co. in 1987. “You could feel from the minute you picked up the phone that this would be a different kind of day. You could tell it from their voices, you could see it in their orders. Instead of 10,000 shares in GE or Coke or Johnson & Johnson, it was, ’Sell 150,000 -- sell, sell, sell.’”
Some clerical people at Salomon Brothers didn’t go home for days, according to James Leman, who oversaw a trading floor support staff of more than 100 for equities and fixed income in the firm’s One New York Plaza headquarters. People slept on cots in their offices or got hotel rooms so they could process the surge in trade tickets and resolve problems with transactions that had missing information, no time stamps or incorrect terms, he said.
“The records were manual,” said Leman, managing director at consulting firm Westwater Corp. in New York. “We had paper tickets and paper floor reports. There was no PC, no e-mail. We were living on computer runs coming out of a mainframe computer.”
The NYSE, predominantly a market run by and for humans in 1987, is now an automated exchange with so-called designated market makers overseeing trading in their assigned stocks. There are four main market makers on the exchange’s trading floor, including Getco LLC, one of the largest automated trading firms, compared to more than 50 specialists at the time of the crash.
Nasdaq has since shifted from a phone-based dealer market to an exchange that matches buy and sell orders electronically. Both NYSE Euronext and Nasdaq OMX Group Inc. are public companies that each own three U.S. securities exchanges and have branched beyond equities into options, futures and technology services. CME Group Inc. is the world’s largest exchange company by market value.
Regulators should require brokers to be able to handle a certain multiple of trading, perhaps 10 times the normal volume, to limit disruptions that could worsen a panic, according to Geduld of Cougar Trading. They should also mandate that high- frequency firms have sufficient capital to complete transactions during the day if the market closes, he said. Firms need the “capacity and financial wherewithal to withstand a crazy day,” Geduld said.
More than 19 billion shares traded in the 2010 flash crash on dozens of different venues, including platforms known as dark pools and among brokers matching orders away from exchanges. The number of market makers on the NYSE had fallen to five from 25 since 2000 as the business of providing liquidity became dominated by hundreds of automated traders across markets with less stringent rules about when they must buy and sell.
Both routs proved to be buying opportunities. Within 10 years of the 1987 crash the Dow average had quadrupled and investors were enjoying the biggest bull market ever. After falling 999 points on May 6, 2010, the gauge ended the day down 348. The Dow rose 6.5 percent through the end of the year.
“Twenty-five years later we’re still talking about the impact of technology on the markets and what kinds of solutions could be created to try to soften the movements,” Ken Leibler, president of the American Stock Exchange in 1987, now a consultant, said in a phone interview.
“With high-frequency trading, there are tremendous amounts of trading done, but now it’s done in thousandths of a second,” he said. “The problem is similar today to what it was back then. The solutions are also likely to be ways to halt trading.”