Newspaper article THE JOURNAL RECORD

1987 Crash Taught Wall Street Simple Lessons

Newspaper article THE JOURNAL RECORD

1987 Crash Taught Wall Street Simple Lessons

Article excerpt

Two years ago on Thursday, John J. Phelan Jr. was plunged into a new world of finance, as markets throughout the world crashed in what was the worst day in the history of stock trading.

Now, less than a week after another severe decline, Phelan, the chairman of the New York Stock Exchange, sees simple lessons.

The markets are in working order, he says, and investors have to accept that the changes in the financial world over the last decade mean that rapid price drops are going to continue to occur.

``The individual investor, I think, has to ignore these aberrations in the market,'' Phelan said.

``Like with the earthquake in San Francisco, individuals should stay indoors until it's over, and not run into the street and panic.''

Phelan said in a series of interviews that the procedures adopted since the 1987 crash gave the exchanges and the government the tools needed to contain the damage after Friday's plunge of 190.85 points in the Dow Jones industrial average.

The crash of 1987 brought about changes that created stronger links between various markets and also provided the methods to deal with the volatility that can result from those links, Phelan said.

New procedures include trading halts, known as circuit breakers, that occur when the market has moved a preset amount in one direction; installation of emergency communications systems between the various exchanges and government agencies that oversee the markets, and an upgrading of the exchanges' ability to execute orders.

``One of the things coming out of 1987 is that circuit breakers have helped create a structure and process that was done on an ad hoc basis in '87, but was done on a formalized basis now,'' Phelan said.

``So when one of these things gets going, a whole bunch of things get triggered off.''

Phelan said, for example, that in the latest sell-off there was good communication with the major government agencies that oversee the markets, including the Federal Reserve Board, the Treasury Department and the two regulatory bodies, the Securities and Exchange Commision and the Commodity Futures Trading Commission.

Official studies done after the 1987 crash criticized both the government agencies and the exchanges for failing to have communication systems adequate to deal with a crisis.

Other changes at the exchanges, Phelan said, have resulted from the dramatic structural changes that have occurred in the financial markets in recent years.

``All through the 1980s, the markets were changing quietly,'' Phelan said.

``Without realizing it, they were becoming linked domestically through trading product, and they were becoming linked, at least internationally, through capital flows.''

In addition, institutions have been taking an increasingly important role in trading compared with individuals, changing the makeup of the domestic markets, Phelan said. …

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