Trading Activity and Price Behavior in the Stock and Stock Index Futures Markets in October 1987

T he events in the equity markets on the days surrounding Monday, October 19, 1987 have been variously described as a meltdown, a crash, a debacle, a break, a collapse, a panic, and "God-or somebody-sending us a signal." In less than a week, equity values fell more than 30 percent; in one day alone, the Dow Jones Industrial Average fell 508 points, or more than 22 percent, while the most active stock index futures contract price fell more than 28 percent. Coincident with the dramatic drop in prices was an equally dramatic rise in trading volume; more than 600 million shares traded on the New York Stock Exchange on the 19th and the 20th, three times the September 1987 daily average. Furthermore, the heavy trading volume occurred amidst numerous opening delays and trading halts for individual stocks; on October 20, the New York Stock Exchange reported 92 opening delays and 175 subsequent trading halts, while the Chicago Mercantile Exchange halted trading in its stock index futures contract for 46 minutes. The demands placed on communications systems by this combination of heavy trading and sporadic halts made it much more difficult for participants to get reliable information about order executions and fund transfers. Growing doubts about the integrity of the trading, clearing, and settlement mechanisms exacerbated the gridlock and threatened the entire system. These events provoked widespread public concern about the operations of the stock and stock index futures contract markets. Virtually every exchange, industry group, and government agency concerned with the equity markets responded with an investigation of its own. In addition, President Reagan created the Presidential Task Force on Market Mechanisms (hereafter referred to as the "Task Force") to investigate these events and to report to him within sixty days. Our discussion here will rely