10 scary market moments

Trading always involves risks, both those you can account for and those you can’t. You can plan for the known risks, but those rarely are what cause panic in the markets. Even the best executed trading strategy can be derailed by unexpected market events.

With the season of fright upon us, we look back at those unexpected events that sent markets running in fear. In many of these events, the impact can be seen in the very names ascribed to them.

Although we may not cover every market moving event, here are our top 10 scariest market moments.

10. Treasury pulls 30-year bond (Oct. 31, 2001)

Our first moment isn’t just frightening — it actually happened on Halloween. For people trading the cash/futures big bond basis, the Treasury Department’s decision to stop issuing 30-year bonds was as scary as it gets. The spread between cash and futures blew up by three full handles, decimating many basis traders who had assumed that the government would need the continued flexibility of 30-year bonds.

The Treasury eventually reintroduced the bond in August 2005, saying that it needed to broaden its investor base and diversify its funding options.

9. U.S. grain embargo (1980)

In January 1980, the Carter administration announced a grain embargo purportedly designed to punish the U.S.S.R. for its invasion of Afghanistan. Under the embargo, the U.S. could sell only eight million tons of grain to the Soviet Union each year (as guaranteed under the 1975 U.S.-Soviet Grain Agreement).

Despite dry weather that harmed the Soviet harvest that year, the U.S.S.R. skirted the embargo and simply imported more grain from South American and European countries. The U.S. commodity markets didn’t fare as well, however, as grain prices dropped in response to decreased export demand. Shortly after being elected, Ronald Reagan lifted the embargo.

8. 1973 oil crisis (Oct. 17, 1973)

It was an image with echoes of the Great Depression: Americans across the country waiting in line for what they believed were necessities. But this time, it was gasoline — not food or employment — that was scarce. Americans who believed in an endless supply of cheap gas were shocked when OPEC initiated an oil embargo in response to the West’s support of Israel in the Yom Kippur war. Prices of oil quickly shot up from about $3 a barrel to roughly $12 a barrel.

The oil crisis compounded problems for a market already reeling from the collapse of the Bretton Woods monetary system and the devaluation of the U.S. dollar. The resulting bear market would continue well into 1974, as the Dow declined 45%.

7. Russian debt crisis (August 1998)

Our next scary moment began in Russia, but certainly didn’t stay there. The prices of crude oil and metals, staples of the country’s economy, plunged following the Asian financial crisis of 1997. In an attempt to shore up the Russian ruble, the government instituted astronomical interest rates for government bonds (GKOs).

The international community attempted to keep Russia from defaulting on its foreign debt with a bailout package from the International Monetary Fund, but the efforts were futile. Investor confidence was shaken, and the stock market plunged. Finally, on Aug. 17, 1998, the Russian government devalued the ruble and announced a de facto default on its foreign debt.

Collateral damage included Long-Term Capital Management (LTCM), a hedge fund that counted several Nobel Prize winners as board members — and was heavily leveraged in the carry trade. In the four months following Russia’s default, the fund lost an estimated $4.6 million, requiring intervention from the Federal Reserve.

6. Flash Crash (May 6, 2010)

Even the most shocking and sudden market crashes generally have apparent causes. But on May 6, 2010, the Dow Jones Industrial Average took a 1,000-point dive — and then regained much of the drop within minutes — for initially mysterious reasons. A subsequent report from the Securities and Exchange Commission and Commodity Futures Trading Commission attributed the incident to “a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral.”

According to the report, which some industry organizations have since disputed, that large trade came when a mutual fund using a sell algorithm dumped 75,000 E-Mini S&P 500 contracts, valued at $4.1 billion, onto the market, which prompted high-frequency traders to buy and sell futures positions. In the aftermath of the crash, officials instituted circuit breakers designed to halt trading on certain stocks that experience rapid price swings.

5. Lehman Brothers bankruptcy (Sept. 15, 2008)

The global financial crisis has resulted in so many bankruptcies and bailouts that it’s sometimes hard to keep them all straight, but Lehman was the one that started it all. Still the largest bankruptcy in U.S. history, with more than $600 billion in assets, the firm’s collapse reverberated through the markets, which suffered the largest single-day point drop since 9/11.

The surprise wasn’t that Lehman failed — the firm reportedly held large positions in the toxic subprime mortgage market — but that the government did nothing about it. Instead of bailing out Lehman, as they had with American International Group and Bear Stearns, government officials decided to cushion the blow of the firm’s demise as best they could (by putting “foam on the runway,” as Timothy Geithner phrased it), a decision that some have blamed for exacerbating the country’s economic crisis.

4. Black Monday (Oct. 19, 1987)

On this Monday in 1987, shocked traders watched as the Dow dropped 508.32 points (or 22.6%) in a single day, the largest one-day percentage decline in history. The drop caused many to flee the markets, and threatened the emergence of equity index futures.

People have pointed to many potential causes of Black Monday. The economy had slowed that year, and several Securities and Exchange Commission insider trading investigations had eroded market confidence further. Many blamed program trading for the crash, although some also pointed to illiquidity and overvaluation as contributing factors. Whatever the reason, the market ultimately recovered and closed up for the year.

3. Panic of 1907 (Oct. 16, 1907)

The panic of 1907 is often overlooked in favor of the Great Depression and our current Great Recession, but its results were profound and long-lasting. It began in October when F. Augustus Heinze’s failed efforts to corner the stock of his United Copper Co. set off a chain reaction of bankruptcies and bank runs. Financier J.P. Morgan, who was attending an out-of-town church convention when the crisis struck, returned to New York and convinced prominent city bankers to join him in pledging millions of dollars to shore up the markets.

But the most significant effect of the Panic came one year later, with the passage of the Aldrich-Vreeland Act. The measure established the National Monetary Commission, whose reports on U.S. and international banking systems spurred the creation of the Federal Reserve in 1913.

2. Black Tuesday (Oct. 29, 1929)

It was the crash to end all crashes. When the Dow fell 12% on Oct. 29, 1929, it signaled the start of a depression that would last for more than a decade. A period of rampant speculation and margin buying in the 1920s had contributed to a stock bubble that eventually bursted with devastating results.

The Great Depression, with its attendant images of bread lines, Hoovervilles and Dust Bowl migrations, has remained part of the U.S. national consciousness ever since. The economic downturn eventually extended around the globe — depressing trade, prices and incomes worldwide. Some countries began to recover by the mid-1930s, but many economists credit the onset of WWII with accelerating economic growth.

1. 9/11 (Sept. 11, 2001)

9/11 was undoubtedly one of the most unnerving moments in the history of U.S. markets — and the history of the U.S. as a whole. The attacks forced the closures of markets including the New York Stock Exchange, NASDAQ, London Stock Exchange and New York Mercantile Exchange. The tragedy also caused brief spikes in commodities such as gold and oil. Although the Dow dropped precipitously when most major markets reopened on Sept. 17, stock prices had almost reached pre-attack levels by mid-October.

For some financial firms, though, the losses involved far more than money: Cantor Fitzgerald, a leading government bond trader headquartered on the 101st-105th floors of One World Trade Center, lost more employees than any other company in the attacks, 650 in all.

 

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