Technological improvements since Black Monday may have shored up the stock market's infrastructure, but two concerns remain:
Are the improvements enough with the increased amounts of potential trading volume?
No amount of technology can protect investors from a market that simply has more sellers than buyers.
Steve Wunsch, president and chief executive officer of the Arizona Stock Exchange, who spoke from his office in New York, doesn't think much has changed in the way the equity markets are structured.
"I would say that things really haven't changed, certainly not for the better since 1987 - either with respect to what is there to protect yourself against the problem or with respect to the likelihood of the problem itself .*.*.," he said.
SEC officials and brokers have blamed the 1987 market crash primarily on confusion, portfolio insurance, antiquated computers processing trades, inadequate equity of market specialists and poor communications.
Among the improvements since then:
The capacity of exchange and broker-dealers computers has been increased to process security trades.
The New York Stock Exchange has expanded its switching and order-processing systems capacity to 500 messages per second. Most exchanges now have three times the capacity needed for average trading sessions.
Planned halts in trading, and coordinated across exchanges, have been established to replace unplanned halts caused by clogged order processing systems.
Market specialists have more equity to help make markets in stocks. The 15 largest broker-dealers have increased total ownership equity by 24%, total net capital by 64% and excess net capital by 65%.
Clearance and settlements systems have been improved for trades, with the time span reduced to one day from three days.
Portfolio insurance, and its trading strategy of selling stock futures as stock prices fell, is no longer a major force in securities markets. Its strategy was blamed for fueling the crash.
But Mr. Wunsch and others don't think the fixes have eliminated the chief cause of the 1987 crash - a market of sellers with few or no buyers - that sent the Dow Jones industrial average plunging 508 points in one day.
And while contributing causes to the crash - such as inadequate technology systems - have been reduced, these observers aren't sure the causes are completely eliminated.
"All of the technology and everything else is wonderful for promoting two-sided markets. (But) when you have everybody being a seller, there are still no buyers around. And, no matter what technology you have around, it is still not going to make any difference," said Wayne H. Wagner, a partner at Plexus Group, Santa Monica, Calif., which provides consulting and monitoring services on domestic and global equity markets.
Still, as a result of the improvements, any future crash wouldn't closely resemble Black Monday, said William Lupien, chairman and chief executive officer of OptiMark, an open trading system based in Durango, Colo.
"I want to say very quickly though, that if there are no contra sides (buyers as well as sellers) you still have the same problem," he said.
Without buyers in the futures market, that market offers no exit either, said Mr. Wagner.
Taking an opposing view are Richard R. Lindsey, director, division of market regulation at the Securities and Exchange Commission, and Anthony P. Pecora, attorney-adviser, division of market regulation at the SEC.
In their paper, "10 Years After: Regulatory Developments in the Securities Markets Since the 1987 Market Break," they contend the structure of the financial system in 1987 wasn't greatly contributed to market confusion and the rapid decline in equities, futures and options markets.
One important change in solving market problems, the SEC officials contend, is cross-market trading halts, often called circuit breakers.
The New York Stock Exchange instituted circuit breakers in response to Black Monday. When the Dow Jones industrial average declines 350 points from the previous day's close, trading in all stocks is halted for 30 minutes. When the DJIA declines 550 points from the previous day's close, trading in all stocks is halted for one hour.
Rules on halting trades have been in effect since Oct. 19, 1988, but they never have been triggered at the NYSE.
The NYSE also has rules that limit program trading under certain conditions.
The hope is that circuit breakers will stop a market freefall, that the market can catch up with trading volume, that value investors will be able to enter the market, and that investors in a panic to get out will have a chance to reconsider and put off any rash sales of securities.
But there is a potentially negative effect of circuit breakers, said Optimark's Mr. Lupien: Panicked investors will try to sell their securities even faster in anticipation of not being able to get out when circuit breakers are imposed.
"These are what I call the unintended responses to things that were designed to solve a problem, but sometimes actually cause a problem," said Mr. Lupien.
And Plexus' Mr. Wagner doubts circuit breakers are going to calm and change the attitudes of panicky sellers in a market freefall.
Even if circuit breakers do slow the fall in the markets, market prices "still go down, not quite as fast or as hard, but still down . . . and they can go down as far or further than the 1987 break," said Mr. Lupien.
Meanwhile, the potential for mass mutual fund redemptions is a greater risk now, he said, because, compared with 1987, a far greater part of retirement savings is controlled by individual investors in the form of 401(k) plans. Another claim is that markets have vastly improved their automated systems to handle transactions and publish quotation information.
Mr. Lupien agrees systems are better today. "(The systems) have far greater capacity than they did 10 years ago," said Mr. Lupien. Ten years ago, he said, the SEC didn't have computer specialists who routinely checked the adequacy of systems at the exchanges.
But, said Mr. Lupien, the increased capacity of automated equipment doesn't remove the potential problem of sellers in a psychological panic.
Mr. Wunsch said market volume and the number of investors both have increased greatly since 1987. "I think the markets are less able to handle imbalances without big movements" in the markets, said Mr. Wunsch.
Because of the greater demand for liquidity and the narrower increments in security quotations, the markets possibly have less ability than in 1987 "to handle price shocks," said Mr. Wunsch.
Also, broker-dealers are relying less on banks for short-term funds and have expanded their sources of funding.
Some have tapped the commercial paper market for almost half their short-term borrowings. They have standby credit facilities with banks or other lending institutions.
The New York Stock Exchange has removed rules that inhibited large firms from entering the specialist business, the report said.
However, Mr. Lupien said what is needed in capital by specialists in comparison to what they have is "shockingly small."
"People don't realize how little it (the amount of specialist capital) is," he said.
He compares a specialist to a shock absorber, smoothing out an otherwise bumpy market. When the absorption capability is gone, the market becomes bumpy.
Mr. Lupien believes the increased volatility of the market in recent months may be partially a result of specialists not having enough capital and relatively inefficient mechanisms to bring buyers and sellers together.
Mr. Lindsey and Mr. Pecora call the U.S. securities markets the most liquid and stable markets in the world. But they conclude not all risk from the U.S. markets can be removed, regardless of innovations in technology or products.
In Mr. Wunsch's view, the markets today are bigger, but their structure "is essentially the same as it was in 1987."
