Old Pros Recall 1987 Market Crash—25 Years Later

On Anniversary of 'Black Monday', Is It Time to Buy Protection?

Three old pros remember Black Monday on 25th anniversary of market crash.

Black Monday — Oct. 19, 1987 — the Dow Jones Industrial Average dropped 508 points (down 22 percent), the largest-ever one-day percentage decline in the Dow.

I was working in Philadelphia that day, but the following morning, while the market was opening, I hopped a train and headed to the place all the traders congregated: Harry's Bar.

Twenty-five years later, I assembled three old pros who were working on the NYSE floor that day, and who are still on the floor: Neil Catania, (MND Partners), Donato Cuttone (Cuttone and Co), and Tom Facchine (GETCO). (Watch interview in the video, below.)

Many on the floor had been hired in the previous five years, because the stock market rally that began in 1982 had expanded employment opportunities on Wall Street.

But no one was prepared for what happened on that day.

Neil Catania, MND Partners: "Brokers on the floor that you saw as iconic, their knees were quaking because nobody ever experienced this...the technology wasn't there yet. The exchanges systems were just getting up to speed — they were never ever made to handle 604 million shares, and it just busted at the seams.

It really did break the system at that point, but the human element never failed. These guys were making markets right to the very end. They were trying to make markets as best they could. These were unprecedented times."

One big worry: no one knew how many bad trades there were. Catania again:

"That day the volume was extraordinary. So when we go to settlement, it was three days, so you figure you're flying this plane blind. People did not know what their exposure was for three days. Think about that this day and age."

What caused the crash? Many blame it on program trading, which was computerized trading in baskets of stocks. A particular type of trading, portfolio insurance, involved hedging positions by selling stock futures indexes.

Tommy Facchine, GETCO: "I think that it did have some impact, but really it just exacerbated the situation more than anything else."

One important point: the following day, the opening was even worse. Many specialists delayed opening their stocks due to huge imbalances (far more sellers than buyers). The Fed stepped in to encourage banks to offer to help out firms on the floor that might be in financial trouble. Midday, the market began to turn around.

Donato Cuttone, Cuttone and Co: "Well I think on Tuesday morning, which was the scariest day for me, October 20th. When you walked in there weren't any bids, and there were tremendous sell orders. The market proved that day that people would step to the plate, make bids, make offers, and continue the marketplace, and it showed that the market worked. And the market works until today; even though it is electronic, there still is a human element to this market that we have in place."

They all laughed when I said that people complained about electronic trading then...and they're still complaining about it.

Catania: "It's funny how the parallels are between today and 1987 with the electronic trading and how some times technology can get a little bit ahead of where we actually are in the times. It's more of the same, you deal with it and you move on. You learn from it."

A Brief Timeline of the 1987 Crash:

The backdrop: the middle of 1987 was characterized by a cooling off of the economy, with higher interest rates.

Wednesday, October 14: Dow dropped 95 points to 2412 (about 4%)

Thursday, October 15: Dow down 48

Friday Oct 16: Dow down 108 points to 2246 on record volume

Monday, Oct. 19. Hong Kong down 11%, London nearly 10%; Paris nearly 12%. Dow drops 508 points, to 1,738, down 22.6%, on record volume of 604.3 million shares

Tuesday, Oct. 20: No bids, big delays in opening stocks, Dow down over 100 points initially, then rallied and ended up 103 points at 1,841

Despite the crash, the market closed UP for the year.

—By CNBC's Bob Pisani

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