Tech in Wall Street, Innovative but Dangerous

Technology in Wall Street Leading up to the 1987 Market Crash

by Alex Glonti

Beyond the scope of socializing and personal entertainment, technology helps entire industries thrive. In the world of finances in October of 1986, the Stock Exchange Automated Quotation system was introduced to the London stock exchange. New tech created new possibilities and progress in the field of finances in Britain[1]. This progress in tech was felt on the other side of the pond as well. The mid-1970’s turned the American Stock Exchange into a different beast – computers and programs began to be at play and younger, bright, more equipped people were gunning for the jobs[2]. One can argue that technology almost always pushes us a step forward, however if not mitigated and controlled it is capable of inflicting enormous damage. The “Black Monday” incident of October 19, 1987 serves as a good example of how innovation and progress can be dangerous even though it’s often a necessity.

The couple of decades leading up to “Black Monday” and to the 1980’s computer infused stock trading had been starkly different from the way things were run on Wall Street during and since the stock market crash of 1987. The 1960’s on wall street were scarce of tech and machinery. Nobody seemed to like technology and in fact abhorred the thought of these machines being involved in their work[3]. People that worked on the Street thought they would get replaced by these new gadgets[4]. Things were picking up for the stock exchange during this period and in a major way. Between 1965 and 1968, the number of shares of stock that was traded had gone from 5 million to approximately 12 million. There was a reduction in the stock’s price that one needed to pay to acquire it. This brought numerous problems for the traders because now paperwork clogged the back offices on Wall Street and clerks were being pushed to the breaking point[5]. This was dubbed the “paperwork crisis” as nobody used computer programs to record transactions and trades – all the work was simply too overwhelming[6]. The beginning of the 1970’s was like how everything operated in the 60’s, acquiring computers for most companies was a long stretch as the ones available at the time were quite expensive[7]. Wall Street still generally stuck to adding machines and simple calculators for some time before the mid 70’s[8]. But a lesson was learned, Wall Street now geared towards a new age of efficiency.

By the mid to late 1970’s Wall Street had fully turned towards technological advancement. Apple and IBM were at odds with each other for the title of the best option for offices[9]. Computer companies such as IBM, Tandem, DEC were used on Wall Street for several purposes – ranging from security trade recording to communications[10]. Technology had permeated work spaces throughout America. This change was necessary and served the purpose of aiding in the field of finances. In 1972 the American stock exchange and the New York stock exchange had been in joint collaboration to create a company called SIAC, otherwise known as Securities Industry Automation Corporation[11]. SIAC was tasked with managing the trading and communication operations that were made by the two largest stock exchanges in the nation. SIAC helped Wall Street process transactions at a much faster rate[12]. Soon after, in 1973 the Depository Trust Company was established creating an electronic database of stock information – trading, ownership and transactions data. In 1975, consolidated tape was used on Wall Street. This tape would allow for the public to look at up-to-date information about stocks and securities[13]. These changes brought new players as well, pitting the old timers against the new blood[14]. Soon the technological boom stopped and Wall Street headed towards the 1980’s fully primed and operational.

The 1980’s were turbulent times on Wall Street. Trading volume had increased more than ever before. Large investments and company appropriations started to take hold as the Street was more opulent and money filled than ever. Wall Street was even showcased in the movie “Wall Street”, released December, 1987. “Greed… is good”, in the words of the film character Gordon Gecko[15], was a poignant slogan for the era. People had used technology to manage their securities and trades in the past, but now it was different. Floor-based trading was beginning to wane as technology introduced itself more and more on Wall Street. Fully electronic stock markets replaced floor trading for the most part and a new way of selling and buying was in action – program trading. Still used today, program trading’s simple explanation would be that it can buy or sell 15 or more stocks valued at over $1 million total. This program was pre-programmed by traders to automatically enter the number of stocks to buy/sell into the New York Stock Exchange electronic system based on the calculated index prices[16]. This has later been called stock index arbitrage and is widely linked to the stock market crash of 1987[17].

Technology has been kind so far to the workers and traders of Wall Street. Unprecedented efficiency levels were being reached as the volume of trade increased. Fate proved to be cruel to these businessmen however. There was an insider rumor that the stock market was going to drop. This rumor led to the banks raising interest rates, resulting in some company’s stock prices going down. Program traders had picked these signals up and automatically started to sell these stocks. Because of it being automated, these programs began to sell stocks of random companies and soon the stock exchange ran out of control[18], culminating with the market crash – Black Monday. “A lot of programs crashed because they weren’t used to handling such a large lion. The numbers were much higher, the loses were much higher. The programs didn’t work that night…”[19], there was no contingency plan that prepared the brokers for a tech malfunction, (‘Lion’ means number of trades). The Dow Jones value dropped a never witnessed 508 points[20]. The technology that was used had been trusted too much for someone to believe it going bad.

Nobody knew why the market crashed on the October Monday of 1987, every finance expert said it wasn’t natural[21]. “People that were rich became poor and a lot of people committed suicide, lost all their money. They jumped off buildings, bridges…[22]”, says Thomas Guardino who was a manager at the world trade center at the time. Indeed, there were two reported suicides during the market crash[23].

If Alan Greenspan, the chairman of the Federal Reserve Board at the time, did not react as fast as he did – using the Fed money supply to keep the Nation’s economy afloat as everybody was losing money; the results would have been devastating[24]. Failure of Program Trading would collapse the entire economic structure of the U.S. More so the failure of oversight by the tradesmen of Wall Street. Technology has proved an invaluable ally to Wall Street, but in a matter of hours it could have been a cause of ruin. Progress is inevitable and needed, yet one should be ever-weary of progress and be able to control it in order to ensure a safe future.

Citations:

[1] Flinders, Karl. “The evolution of stock market technology.” Http://www.computerweekly.com. November 02, 2007. http://www.computerweekly.com/news/2240083742/The-evolution-of-stock-market-technology.

[2] Schwartz, Robert A., John Aidan. Byrne, and Gretchen Schnee. Rethinking Regulatory Structure. New York, NY: Springer New York, 2013. 99-100

[3] Schwartz, Robert A., John Aidan. Byrne, and Gretchen Schnee. Rethinking Regulatory Structure. New York, NY: Springer New York, 2013. 99-100

[4] Interview with Thomas Guardino, Staten Island, NY, March 25, 2017

[5] Jones, Capers. The technical and social history of software engineering. Upper Saddle River, NJ: Addison-Wesley, 2014. 117

[6] Gomstyn, Alice. “Remembering the 1960s Paperwork Crisis.” The Alert Investor. August 31, 2015. Accessed April 30, 2017. https://www.thealertinvestor.com/when-paper-paralyzed-wall-street-remembering-the-1960s-paperwork-crisis/.

[7] Gomstyn, Alice.”Remembering the 1960s Paperwork Crisis.” The Alert Investor. August 31, 2015. Accessed April 30, 2017. https://www.thealertinvestor.com/when-paper-paralyzed-wall-street-remembering-the-1960s-paperwork-crisis/.

[8] Interview with Thomas Guardino, Staten Island, NY, March 25, 2017

[9]Jack Doyle, “Apple, Rising:1976-1985,”
PopHistoryDig.com, May 10, 2010.

[10] Interview with Thomas Guardino, Staten Island, NY, April 20, 2017

[11] Shaw, Meredith. “Technological Advancements on Wall Street.” The History of Wall Street — The evolution of financial markets of the United States since 1865. April 24, 2015. Accessed April 30, 2017. http://meredithshaw.web.unc.edu/2015/04/24/72/.

[12] Shaw, Meredith. “Technological Advancements on Wall Street.” The History of Wall Street — The evolution of financial markets of the United States since 1865. April 24, 2015. Accessed April 30, 2017. http://meredithshaw.web.unc.edu/2015/04/24/72/.

[13] Shaw, Meredith. “Technological Advancements on Wall Street.” The History of Wall Street — The evolution of financial markets of the United States since 1865. April 24, 2015. Accessed April 30, 2017. http://meredithshaw.web.unc.edu/2015/04/24/72/.

[14] Interview with Thomas Guardino, Staten Island, NY, March 25, 2017

[15] Kulikowski, Laurie. “Wall Street, Then and Now.” TheStreet. September 24, 2010. Accessed April 30, 2017. https://www.thestreet.com/story/10870384/2/wall-street-then-and-now.html.

[16] Michael J. McGowan, The Rise of Computerized High Frequency Trading: Use and Controversy (Duke Law & Technology Review, 2010) 5

[17] Michael J. McGowan, The Rise of Computerized High Frequency Trading: Use and Controversy (Duke Law & Technology Review, 2010) 5

[18] Interview with Thomas Guardino, Staten Island, NY, March 25, 2017

[19] Interview with Thomas Guardino, Staten Island, NY, March 25, 2017

[20] Brands, H. W. American dreams: the United States since 1945. New York: Penguin Books, 2011. 265-266

[21] Brands, H. W. American dreams: the United States since 1945. New York: Penguin Books, 2011. 265-266

[22] Interview with Thomas Guardino, Staten Island, NY, March 25, 2017

[23] Rastogi, Nina. “Why aren’t we seeing any suicides on Wall Street?” Slate Magazine. September 22, 2008. Accessed May 01, 2017. http://www.slate.com/articles/news_and_politics/explainer/2008/09/wall_street_suicides.html.

[24] Brands, H. W. American dreams: the United States since 1945. New York: Penguin Books, 2011. 265-266

SELECTIONS FROM INTERVIEW TRANSCRIPTS

Interviews with Thomas Guardino:

  • Audio Recording, Staten Island, NY, March 25, 2017

Q. How did you start of your career on wall street, where did it all start for you?

A. ” Well to make it short, when I came out of high school I made a couple of bucks but I really didn’t have enough money to go to college because my parents were divorced and it would have been hard. So when I got out of school I went to work at an office job for a couple of months… There [Chester-Blackburn and Roder/Atlantic Lines – steam-ship company] gave an IQ test and I ended up with the best mark in the company… They sent me to school and taught me programming, but offices didn’t have any computers most of the time… This was in the beginning 70’s. The companies back then had adding machines, calculators, typewriters. but they wanted to get computers and [Atlantic Lines] wanted me to learn programming so I could set up the accounting systems… at the time I had no idea what the test was for… but later the boss came back to me and said, “you have the best mark here, were taking you to learn the business, to learn the computer, write the software and partner together”. At the time I was 19 years old… I had two private tutors in IBM at the time and that’s how I got into the computer business in the beginning. The interesting thing is… we had an office at Whitehall street which was downtown Manhattan near the ferry and they wanted to put their computer into the world trade center; we were moved there but it was being built then, the building. So my company got special permission to set up a room, there was just one door with no walls set up, just wires everywhere… they wanted to put the computer in there and I was working there by myself, nobody worked in the trade center then… But I got permission to go into the trade center, go to the test floor and to work in a building that wasn’t even fully constructed… I was the first to work there, not counting the port authority people… I worked on the [their] floor for a couple of months before they actually had the office ready; the tutors came there to show me how to work… All the people in the company resented me because they thought that the computers around would take away their jobs at the time, so nobody liked me… what happened actually was the computer was so much work in the beginning that it actually created many jobs – it wasn’t like today… you needed people to run the programs. You needed people for a lot of manual parts, like sorting the cards… so no one really lost their jobs at the time. Anyway, I worked there for about 8 years, since 1970. I worked in [Atlantic Lines] Miami office too… But the work became hard eventually, [Atlantic Lines] kept wanting more programs but they were too cheap to upgrade the computers so I had to constantly rewrite the programs and break them up. It became so hard that I was leaving work in the middle of the night… in 1978 me and my wife were going to have a baby but only the job was on my mind, so I told my wife that I had to get out of there because I couldn’t take it anymore. I was good at it but it was too much work…

So I got an interview for this company called SIAC[Securities Industry Automation Corporation] but I didn’t know that it was related to the stock market, in fact it was owned by two stock market companies and SIAC was the company that did all their computer work. So the New York Stock Exchange and the American Stock Exchange made this company called SIAC, but nobody knew that this company did all the trading and controlled everything that the stock market did on the trading floor…”

 

Q. How were things run at the job?

A. “At first we would come in at 4 AM and leave at 6 or 7, in 3 hours, but as the years went more people came for work and they added another shift… I eventually managed 3 shifts at SIAC. The place grew… A lot of people thought the stock market was wall street… but nobody knew SIAC did a lot of trading work for the companies, it was a part of the stock market… we did a lot of work for the stock market, but did work for big companies that were involved in the industry… we didn’t have a lot of work at the time, but everything was critical because if something didn’t work we had to escalate… the newspapers would actually wait for us to send the information out, we were the only source for the prices of the stocks they could put into their papers.”

Q. How did you make deals, sell/buy stocks and operate?

A. “Well back in the day everything was done by pencil… but in our time we used computers and thought the computers were the greatest thing ever, they weren’t powerful at all compared to today; they took up half the room… The memory, the processing speed was very slow and it cosst $20,000 to $30,000… The computers had all the opening and closing prices, all the trading information of the different stocks, we had to run programs and update the prices on the computers by the end of the day for the following day. There were a lot of print outs, we had to send reports to different trading offices… everything was done through big floppy cards and everything was put onto tape to save the information. But I saw that transition as I was working in the business – when they started eliminating the tapes.”

Q. What position did you hold in 1987?

A. “I was a manager at the American Stock Exchange which was the second biggest exchange in the country, New York was first…”

Q. Could you describe the trading process during that time?

A. “There wasn’t a trading floor, the banks would send their representatives to the trading floor and buy seats there to be able to trade. The prices for the seats were pretty high and there were about a thousand seats, the companies even traded each other for the seats… the trading floor had different levels like balconies, it looked like a movie theater. The big shots were on the higher levels and they had their clerks on the trading floor who they talked to with walkie talkies. They signaled for the people on the trading floor what they wanted to do, to buy or sell a stock… These clerks had cards they would mark up by pen and take them to the card readers on the floor and everything on the cards, the trading decisions and information was sent to SIAC. But these clerks didn’t get paid as the top guys did… in 1970’s they were doing the same thing, but they didn’t have all the computer programs so it had to be done with pen and pencil, but they had what they needed.”

Q. What was the reason the 1987 stock market crashed?

A. “Not too long before the crash, they introduced program trading… It became popular in the 80’s because if the stocks were going down or up the program trading would automatically sell or buy people stocks. This was being done through certain programs and they say these programs caused the market crash. Before that the stock market was doing pretty good… There were rumors the stock market was going to drop so the banks raised the interest rates because of the rumor. Some of the companies’ stocks started to go down because of the higher interest rates, the program traders they had automatically started to trade these stocks, keep selling… Soon program trading started selling stocks of all different companies, it was out of control. Then all the people that wanted to sell the stocks, they couldn’t do anything… nobody wanted to buy… But program trading, if id didn’t get out of control was very helpful, it just needed something to stop it. The market went down 20%… That’s why later they installed circuit breakers on every system. If percentages fell by a certain percent within a specific time, everything would shut down. But this was after the crash.”

Q. Who did the people blame, what were the repercussions?

A. “People that were rich became poor and a lot of people committed suicide, lost all their money. They jumped off buildings, bridges – they had families but committed suicide cause they lost everything they had in one day… They said there were a couple of murders, some brokers got murdered by people in the same industry.

It was the fault of panic and the automatic program trading. That’s what actually caused it.”

Q. What happened to you during the crash?

A. “They called me early that day because the “lion” was too high. The lion’s the number of trades… the amount of trading and selling of stocks was too high and prices went down too much. Everybody was selling. My shift was usually at 3 AM, but I came in at midnight – they called us early to come up with some strategy cause they knew a lot of the programs that ran in the night time that sent the data to the newspapers didn’t work… A lot of programs crashed because they weren’t used to handling such a large lion. The numbers were much higher, the loses were much higher. The programs didn’t work that night… We had to be on the phone all night with people, we stayed there all night because everything had to be done until the next day or the stock market couldn’t open. The press was waiting… This was “black monday”. I don’t think I left home that night… The programs took so long to run, everybody was worried we wouldn’t make the opening for the next day… That whole week programs were crashing, but we had ways to go around it, program substitutions…”

Q. Who did this affect mostly?

A. “The rich people were really affected, but normal people weren’t affected. We didn’t have a 401K and didn’t own stocks and bonds… For the most part rich people were affected and a lot of them committed suicide because of the crash. A lot of people took their money out, but the middle class wasn’t touched. I didn’t take out my money, because I knew things would come around, they always do…”

  • Audio Recording, Staten Island, NY, April 20, 2017

Q. What kind of computers did you use in the stock exchange?

A. “…We were using IBM 3, a lot of banks had that… Everything related to the hardware was duplicated, so if one part went down they had spare parts… We had two computer systems – one was for production and we had one for testing…

When I first started, the system that was really popular then, it’s company was called DEC (Digital Equipment Company)… We used PVP-1145 and then it was upgraded to a PVP-1170… There was another system also that was very popular called Tandem… This was in the late 70’s to the early 90’s… Now we probably got phones more powerful than those systems…”

Q. What was the situation around you on the floor during the crash?

A. “They (programmers/stock brokers) used to check the information on cards and give it to people on the trading floor, and then they would have to input that data into systems. So of course they had a tremendous amount of work, because the ‘lion’ was crazy… There was a lot of panic on the floor, but I didn’t see that for the most part. We were the operations department and we saw the systems and programs crashing because the ‘lion’ was too big. We had a lot of problems through the day because too much information was coming in and the systems would crash. We worked I don’t know how many hours that week because there was so much work to do…”

Q. Would you say technology and program trading in particular was the biggest reason for the crash?

A. “Actually it was one of the main reasons because when the markets started doing bad, program trading assumed that other things would happen and it automatically made people want to sell more… Automatic trading was a big problem with that because the technology at the time wasn’t able to stop this from happening…

Also even after that (market crash) we had lots of hardware and software problems… I remember one time the NYSE was down for almost the whole day and lost millions of dollars because of hardware issues…”


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