My weekend reading got me thinking about 1987. I read that the percentage of bullish advisors has not been this high since 1987. The percentage of bullish advisors is usually a contrary indicator: when a large majority become bullish, a downturn can usually be expected. The reference to 1987 sent me back to October 19th, sitting at my desk at Wheat First Securities, watching an eerie green Quotron and listening to the AP newswire machine chatter and ding. It would ding when there was a big headline, and there were a lot of big headlines.
Beyond the stunning stock market drop of over 20% in a day (the equivalent of 3,400 Dow points today), the New York Stock Exchange was overwhelmed with a huge volume of trades. Early on the 19th, traders began experiencing confirmation delays. Some trades were not confirmed for days. Investors placed market orders and for days had no idea if they had been executed or at what price.
Reflecting on that crash and thinking about the current trading volume of over a billion shares a day, I began to worry about the “Flash Crash” we had a couple of years ago and what might happen if all of those computer programs decided to sell as much as they could in some fraction of a second. What would happen across all of the “dark pools” and remote trading platforms? Could the bottom drop out, or might we face a 1987 type choke-point?
I called my friend and fellow CNBC Contributor Ken Polcari on the Floor of the NYSE. Ken reported on Rule 80B. These new rules were instituted about 2 yrs ago, but they have never been triggered.
RULE 80B –
Market Wide Circuit Breakers (MWCB) Calculated daily based on the closing level of the S&P 500 closing price.
Level 1 – a drop to a 7% threshold is considered a breach – 15 min trading halt ACROSS ALL VENUES.
Level 2 – a further drop of 6% (total of 13% from closing level) – another 15 min halt ACROSS ALL VENUES
Level 3 – a further 7% move (total of 20% from closing level) – trading is halted for the remainder of the day and remains closed until the PRIMARY LISTED MARKETPLACE opens the stock on the following day.
This provided some relief. Knowing that when the Primary Marketplace halts, all the dark pools and remote platforms also halt keeps the process sound. Ken says these breakers are only imposed in DOWN MKTS. If the market rallies 8% in a day, everyone celebrates….no reason to halt trading!!!
Technology seems to have solved the trade execution issue, so I don’t foresee an overwhelming market shutdown. Fidelity now offers an amazing 1 second trade confirmation guarantee.
When markets are making all-time highs and valuations are full, my ruminations become more defensive. Because trends last a lot longer than anyone thinks they will, my sense of caution may wear thin before it’s validated. Ours is a business of numbers and psychology. Emotion is the foe of the long-term investor. Vigilance and discipline are always welcome and wise companions.