{"id":3105,"date":"2017-05-01T18:40:14","date_gmt":"2017-05-01T18:40:14","guid":{"rendered":"http:\/\/blogs.dickinson.edu\/hist-118pinsker\/?p=3105"},"modified":"2017-08-23T14:13:50","modified_gmt":"2017-08-23T14:13:50","slug":"tech-in-wall-street-innovative-but-dangerous-2","status":"publish","type":"post","link":"https:\/\/blogs.dickinson.edu\/hist-118pinsker\/2017\/05\/01\/tech-in-wall-street-innovative-but-dangerous-2\/","title":{"rendered":"Tech in Wall Street, Innovative but Dangerous"},"content":{"rendered":"

Technology in Wall Street Leading up to\u00a0the 1987 Market Crash<\/strong><\/p>\n

by Alex Glonti<\/p>\n

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]<\/a>. This progress in tech was felt on the other side of the pond as well. The mid-1970\u2019s turned the American Stock Exchange into a different beast \u2013 computers and programs began to be at play and younger, bright, more equipped people were gunning for the jobs[2]<\/a>. 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 \u201cBlack Monday\u201d incident of October 19, 1987 serves as a good example of how innovation and progress can be dangerous even though it\u2019s often a necessity.<\/p>\n

The couple of decades leading up to \u201cBlack Monday\u201d and to the 1980\u2019s 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\u2019s 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]<\/a>. People that worked on the Street thought they would get replaced by these new gadgets[4]<\/a>. 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\u2019s 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]<\/a>. This was dubbed the \u201cpaperwork crisis\u201d as nobody used computer programs to record transactions and trades – all the work was simply too overwhelming[6]<\/a>. The beginning of the 1970\u2019s was like how everything operated in the 60\u2019s, acquiring computers for most companies was a long stretch as the ones available at the time were quite expensive[7]<\/a>. Wall Street still generally stuck to adding machines and simple calculators for some time before the mid 70\u2019s[8]<\/a>. But a lesson was learned, Wall Street now geared towards a new age of efficiency.<\/p>\n

By the mid to late 1970\u2019s 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]<\/a>. Computer companies such as IBM, Tandem, DEC were used on Wall Street for several purposes – ranging from security trade recording to communications[10]<\/a>. 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]<\/a>. 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]<\/a>. Soon after, in 1973 the Depository Trust Company was established creating an electronic database of stock information \u2013 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]<\/a>. These changes brought new players as well, pitting the old timers against the new blood[14]<\/a>. Soon the technological boom stopped and Wall Street headed towards the 1980\u2019s fully primed and operational.<\/p>\n

The 1980\u2019s 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 \u201cWall Street\u201d, released December, 1987. \u201cGreed\u2026 is good\u201d, in the words of the film character Gordon Gecko[15]<\/a>, 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 \u2013 program trading. Still used today, program trading\u2019s 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]<\/a>. This has later been called stock index arbitrage and is widely linked to the stock market crash of 1987[17]<\/a>.<\/p>\n

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\u2019s 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]<\/a>, culminating with the market crash \u2013 Black Monday. \u201cA lot of programs crashed because they weren\u2019t used to handling such a large lion. The numbers were much higher, the loses were much higher. The programs didn\u2019t work that night\u2026\u201d[19]<\/a>, there was no contingency plan that prepared the brokers for a tech malfunction, (\u2018Lion\u2019 means number of trades). The Dow Jones value dropped a never witnessed 508 points[20]<\/a>. The technology that was used had been trusted too much for someone to believe it going bad.<\/p>\n

Nobody knew why the market crashed on the October Monday of 1987, every finance expert said it wasn\u2019t natural[21]<\/a>. \u201cPeople that were rich became poor and a lot of people committed suicide, lost all their money. They jumped off buildings, bridges\u2026[22]<\/a>\u201d, 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]<\/a>.<\/p>\n

If Alan Greenspan, the chairman of the Federal Reserve Board at the time, did not react as fast as he did \u2013 using the Fed money supply to keep the Nation\u2019s economy afloat as everybody was losing money; the results would have been devastating[24]<\/a>. 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\u00a0one should be ever-weary of progress and be able to control it in order to ensure a safe future.<\/p>\n