— The Catastrophe of October 19 1987

- The Catastrophe of October 19, 1987. . . And Beyond - BLACK MONDAY International Finance 2009 Malena Koke

Agenda • • • Black Monday: Facts About The Reading Definitions and Information Summary of the Reading Possible Reasons for the Crash Conclusion Malena Koke – International Finance 2009 EWHA Womans University GSIS

Black Monday: Facts • First stock market crash after World War II • Dow Jones fell within one day by 22, 6 % largest one-day percentage decline in history (508 points) • The crash spread out fast & widely. . • Australia: • Canada: -41, 8 % -22, 5% • Hong Kong: • UK: -45, 8 % -26, 4% • Name refers to „Black Thursday“, NY crash in 1929 that lead into the global economic crisis Malena Koke – International Finance 2009 EWHA Womans University GSIS

Black Monday. . Malena Koke – International Finance 2009 EWHA Womans University GSIS

Black Monday: Facts • First stock market crash after World War II • Dow Jones fell within one day by 22, 6 % largest one-day percentage decline in history (508 points) • The crash spread out fast & widely. . • Australia: • Canada: -41, 8 % -22, 5% • Hong Kong: • UK: -45, 8 % -26, 4% • Name refers to „Black Thursday“, NY crash in 1929 that lead into the global economic crisis Malena Koke – International Finance 2009 EWHA Womans University GSIS

About The Reading • Tim Metz: From Black Monday • The Catastrophe of October 19, 1987. . . and Beyond • Excerpt from the book „Panic“ by Michael Lewis • Tells the happenings, emotions and fears of Black Monday and the day after from some NYSE responsible persons‘ perspectives (especially John Phelan‘s view) Malena Koke – International Finance 2009 EWHA Womans University GSIS

Terms and Information • John Phelan (Chairman of NYSE) One of the key figures of the reading: person with high responsibility • DOT-System = Designated Order Turnaround an automated order system that allows program trading Malena Koke – International Finance 2009 EWHA Womans University GSIS

Terms and Information • NYSE „Specialist“ also called market maker or dealer assigned by the NYSE to conduct the auction process and maintain an orderly market in one or more designated stocks can act as a broker (agent) and dealer (principal) Malena Koke – International Finance 2009 EWHA Womans University GSIS

Specialists: Broker and Dealer NYSE Specialist BROKER § Transact customer orders in their assigned stocks § These assigned stocks arrive per email or are entrusted to them by a floor broker to be executed IF and WHEN a stock reaches a price specified by a customer (limit or stop order) NYSE Specialist DEALER § Buy and sell shares in their assigned stocks for their own account as neccessary to maintain an orderly market § Specialists must always give precedence to public orders over trading for their own account § Public orders, are sent via “Super. Dot” or from the member firm’s office to its representative on the exchange floor, who tries to execute the order in the trading crowd Malena Koke – International Finance 2009 EWHA Womans University GSIS

Summary • Mr. Phelan meets with 6 other NYSE experts the morning after the crash to discuss their further course of actions • Mr. Phelan is deeply concerned. . . • Imbalance of orders in the DOT System already after 30 minutes ($25 million sell orders and only $15 million buy orders) how to convince specialists to start trading at a price not too high ? • Main tasks now: handling investor‘s and specialist‘s fears Malena Koke – International Finance 2009 EWHA Womans University GSIS

Summary • Sth. has to be done in order to encourage buying and discourage selling! But how? Everything lies within the power of the men in this room • today, wrong opening price would be disastrous, a price too high could easily attract more selleers than buyers how to convince specialist traders to start selling at prices not too high? - because they decide where they start trading Malena Koke – International Finance 2009 EWHA Womans University GSIS

What do do know? Who‘s the culprit? • program trading caused the crash? press full of accusations that program trading was the culprit Phelan‘s course of action: • ask before opening of the market all members of DOT system to refrain (voluntarily) from the DOT system for program trading today (they won’t refuse) • stimulate needed buying by conveying the consensus of this morning’s meeting to all the specialist traders on the floor well ahead of the opening Malena Koke – International Finance 2009 EWHA Womans University GSIS

Conclusion • Debate as to the cause of the crash still continues many years after the event, with no firm conclusions reached how to deal with FEAR and PANIC? How to deal with IRRATIONALITY? Malena Koke – International Finance 2009 EWHA Womans University GSIS

Conclusion • Panic can have a deep impact on human’s decisions • psychological factors can be more important than external economic factors don‘t underestimate the impact of irrationality! Malena Koke – International Finance 2009 EWHA Womans University GSIS

If you want to know more about BM. . . Reasons for the Crash . . click on the article Malena Koke – International Finance 2009 EWHA Womans University GSIS

Questions ? Comments ? Malena Koke – International Finance 2009 EWHA Womans University GSIS

Thank you for your attention ! Malena Koke – International Finance 2009 EWHA Womans University GSIS