{"id":3793,"date":"2017-12-08T19:26:01","date_gmt":"2017-12-08T19:26:01","guid":{"rendered":"http:\/\/blogs.dickinson.edu\/hist-118pinsker\/?p=3793"},"modified":"2018-01-15T15:00:07","modified_gmt":"2018-01-15T15:00:07","slug":"3793","status":"publish","type":"post","link":"https:\/\/blogs.dickinson.edu\/hist-118pinsker\/2017\/12\/08\/3793\/","title":{"rendered":"Technology on Wall Street Since 1987: for Better or Worse"},"content":{"rendered":"

Technology on Wall Street Since 1987: for Better or Worse<\/strong><\/p>\n

By: Charlie Luparello<\/p>\n

\"Courtesy

Courtesy of Investment U<\/p><\/div>\n

In 1987, Steve Luparello was working as a junior lawyer for the SEC, in its Division of Market Regulation. The group was responsible for overseeing and regulating a number of different participants in the markets, including brokers and exchanges. The months leading up to October 19, 1987 were comparable to the other stock market crashes in United States history. The Dow Jones Industrial Average was at a high and the market continued to rise steadily. Traders were experiencing great success, prompting even people with little market experience to test their chances. \u00a0<\/span><\/p>\n

One of the main factors behind the markets success was program trading. Program trading was a method used by traders in which an automated system bought and sold stocks once the value reached a certain level, and was usually used by larger companies.[1] Although at the time, many traders considered program trading a flawless system, eventually issues began to become evident. Originally, program trading worked as intended. The problem with program trading was the program assumed the person controlling it was the only one buying and selling, when in fact many traders were using the same method. Although there were warning signs of the possible shift of the stock market, traders and investors carried on with their routine. Eventually, on Friday October 16, 1987 the Dow Jones Industrial Average plummeted. The DJIA dropped 108 points on that day, making it the first hundred-point loss in a twenty-four-hour period. People involved with the stock market were frustrated by the drop, but knew 108 points was manageable. The next trading day, Monday the 19<\/span>th<\/span>, the market went from bad to worse. On the morning of Monday October 19, 1987, the DJIA had an initial drop of 200 points.[2] When asked about his reaction to the initial drop Luparello responded, “In some ways there was fear, because there really was no telling how far the market would fall and what that might do to the overall economy.”[3] The fear was justified, as by the end of the day the DIJA dropped a total of 508 points, the largest loss on a single day in stock market history. October 19<\/span>th<\/span>, which later became known as Black Monday, was worse than any single day during the Great Depression and had many fearing a profound effect on the economy.[4] In addition, the United States was not the only stock market that experienced difficulties. After the October 16<\/span>th<\/span> drop other major foreign stock markets crashed including Tokyo, London and Frankfurt.[5] <\/span><\/p>\n

During 1987 Stock Market crash regulators suffered from a lack of technology. When asked about how an absence of technology affected Luparello’s situation, he responded, “…the lack of sophisticated technology also added to the level of surprise that we experienced during the event. If our monitoring tools were as ‘modern’ as the trading systems, there was a chance we could have put certain protections in place to minimize the size of the crash.”[6] The SEC did not have the advanced technology to easily deal with the events that were unfolding, because advancements that occurred on Wall Street were more complex and sophisticated. \u00a0<\/span><\/p>\n

A common theme in the stock market is that new technology will be developed and regulators will create new rules and advancements to counter the traders. The issue regarding the Crash of 1987 was the newest technology on Wall Street ultimately contributed to the crash. Many traders considered program trading the future of Wall Street. For a period of time, program trading was making people a large sum of money and everybody thought they had solved the puzzle of stock trading. \u00a0The regulator’s response to the issue program trading brought was to implement circuit breakers.[7] Circuit breakers prevent panic selling and ensure the DJIA will never move too far too fast. With circuit breakers in place there is little fear of another crash based of program trading. \u00a0<\/span><\/p>\n

Since the crash of 1987, the stock market has constantly evolved and developed new technology. Although the stock market crash was only thirty years ago, the stock market today is completely different than in the past. A major change in the past thirty years is the diminished roles of New York Stock Exchange and NASDAQ. During 1987 the NYSE and NASDAQ were titans of the stock trading industry. Today, the NYSE and NASDAQ are still the two biggest exchanges in the country, but control significantly less activity due to more competition.[8] Technology has given traders an easier and more efficient way to trade. In the late 1980’s, stock trading involved a significant amount of human interaction. Now everything is online and the entire process is easier. The internet is a major reason why trading has become a faster process. Present day traders can do research, buy, and sell stock from anywhere. Luparello discussed the downfall of the role of people involved with the stock market by stating,<\/span>“<\/b>Pre-1987, human beings still played a big role, always deciding what to buy, but also pretty much using human instinct on how to buy. Now, human touch is still a big part of what to buy, but computer algorithms control the how, and if humans tried to compete, they would lose.”[9] <\/span><\/p>\n

Courtesy of CNBC<\/p><\/div>\n

When traders develop new technology, it is usually in an attempt to make trading stocks easier and quicker, and sometimes that creates problems in the stock market. Regulators will then need to create a solution to the problem the traders have created, and this often calls for the creation of new rules or new technology. In 2010 the S&P 500, the DJIA, and the Nasdaq suddenly dropped and quickly recovered with little know reason. The quick collapse of the exchanges became known as the Flash Crash.[10] As a response to the Flash Crash regulators forced markets to create market access controls. Market access controls limit the total amount of orders sent out on the market at a single time, which makes another flash crash much less likely. In an ideal world, regulators could develop strategies that would stop market disasters before they happened, but that type of forward thinking is very challenging.<\/span><\/p>\n

Throughout American Dreams, the author, H.W. Brands, references the theme that America will continuously advance and technology will help drive it. New technology creates a quick change in people’s lives. A quick change may be beneficial, but can also be harmful. New technology will be developed and this creation will make everyday life easier, but because technology can create risk, legislators may have to create certain rules regarding these advancements. Wall Street is similar to the real world because whenever traders develop a new system or method, usually regulators will have to construct rules in response. Ideally, regulators would be able to control the stock market and prevent any difficult situations with the technology that they have acquired. For example, regulators create new responses based off what the market has already experienced. Luparello described the situation as, “But the reality is that regulator’s tools always lag behind the tools the market uses.”[11]\u00a0<\/span><\/p>\n

Technology on Wall Street and in the real world have certain parallels. A cell phone ten years ago would be a large piece of plastic with the sole purpose of calling. In the present day, a smartphone is not only a phone, but also a computer, a watch, and a camera, among other things. But progress brings risk. New technology may lead to stress, distraction, or a higher level of deception. Although technology backfires, often new advancements are beneficial. \u00a0\u00a0<\/span><\/p>\n

Just like on Wall Street, new legislation is necessary in order to control new technology. Certain laws have been placed on new technology, such as the internet, regarding what can and cannot be done. must be progressive. For both Wall Street and the real world, new technology is essential because the world must progress. It is important however because new technology can be either harmful or beneficial, for regulators to monitor and control it. <\/span><\/p>\n

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