NEW YORK (CNNfn) - In the wake of the Oct. 19, 1987, stock-market crash, the New York Stock Exchange took several steps designed to prevent another market meltdown.
In 1988, the NYSE adopted so-called "circuit breakers" -- trading rules designed to slow falling prices in the event of a potential collapse.
But some experts say the "circuit breakers" will only prolong -- not prevent -- a plunge equal in magnitude to 1987's "Black Monday."
"If everybody's trying to get out of the market, the circuit breaker's (not) going to stop them," said Bill Cheney, chief economist at John Hancock Financial Services. "It may just stop them all from doing it within half an hour."
Cheney said he's not even convinced the circuit breakers "are capable of spreading (a crash) out over two or three days. I kind of doubt even that."
The NYSE adopted the circuit breakers after the Dow Jones industrial average plummeted 508 points -- the largest one-day point and percentage loss ever -- on Oct. 19, 1997.
The most commonly triggered circuit breaker is the "uptick/downtick" rule, which kicks in whenever the Dow moves 50 points up or down from where the market opened.
The rule affects index-arbitrage orders in component stocks of the S&P 500 stock index.
In down markets, arbitrageurs can only sell S&P 500 component stocks when the given component stock's price is rising -- not falling.
Conversely, in up markets, arbitrageurs can only buy S&P components when price are falling.
Once triggered, the uptick/downtick rule applies for the rest of the trading day, unless the Dow moves to within 25 points of its opening level.
Another circuit breaker, the "sidecar rule," pauses program trading for five minutes whenever S&P 500 futures contracts decline 12 points from their opening level.
During the five minutes, exchange officials put all program trades -- defined as orders involving baskets of 15 stocks or more and dollar values of $1 million or higher -- on hold, as if stuck in a "sidecar."
After five minutes, the exchange will try to pair off all buy and sell program orders stuck in the "sidecar."
But if there are more sell orders than buy orders, or vice versa, the NYSE won't execute any of the trades until enough new orders of the right type come in to balance things out.
However, the "sidecar" rule does not apply in the last 35 minutes of trading.
The most severe trading curbs adopted since the crash have never actually been triggered -- at least not yet.
Under these two curbs, the NYSE will halt all trading for 30 minutes if the Dow plunges 350 points from the opening level.
After trading resumes, if the blue-chip index plummets another 200 points -- or a total of 550 points from the day's opening -- the exchange will halt trading a second time, this time for one hour.
In addition to adopting circuit breakers, the NYSE has also increased trading capacity, hoping to avoid a replay of Oct. 19-20, 1987, when volume outstripped computer capabilities.
On both Oct. 19 and 20, 1987, daily trading volume climbed above 600 million shares at a time when NYSE computers could only handle transactions involving an estimated 420 million to 440 million shares.
As a result, stock tickers ran hours behind actual trading, leaving investors uncertain as to where prices really stood.
Today, computer improvements have lifted NYSE daily trading capacity to about 2.3 billion to 2.7 billion shares -- five times the current average volume of 510.8 million shares per day.
Experts say more trading capacity could calm markets in a potential crash.
"Superficially, one would think that more trading would mean bigger swings, (but) it is just as likely that the ease of doing more transactions would actually enable more equilibration to take place," Cheney said.
He explained that allowing more investors to jump in during a plunge could help pull prices back to middle ground, not just drive the market further down.
Yet despite all of the changes since 1987, some wonder whether the almost 3-year-old stock-market rally has set the stage for The Crash of 1997.
Eric Miller, chief investment officer at Donaldson, Lufkin & Jenrette, said that like 1987, 1997 has seen a strong price runup between January and August, along with "a lot of euphoria (and) very high valuations."
But otherwise, 1987 and 1997 are very different, he said.
"Inflation was rising (in 1987, but) it's very low and steady now," Miller said. "Overall, both monetary and fiscal policy are steadier."
Joseph Duncan, chief economic adviser for Dun & Bradstreet, also thinks that unlike 1987, Wall Street in 1997 "truly (is) a global market. We have investors flowing into our market from around the world, and we're investing our money around the world."
Duncan said such changes make a coordinated, one-day global pullout from U.S. stocks highly unlikely.
Experts also note that in October 1987, U.S. Federal Reserve Chairman Alan Greenspan -- the man whose musings today move markets -- had only been on the job for two months.
"To an extent, Greenspan was a lesser-known quantity at the Fed (in 1987), as opposed to the Fed now having a very high degree of credibility," Miller said.
Additionally, analysts say another factor making 1997 different from 10 years ago involves the stock market's makeup.
Duncan said that while a lot of investors had their money in individual stocks in 1987, more and more people are now in mutual funds.
Mutual-fund sales, in fact, have more than quintupled in the past decade to reach $407.9 billion in 1996, according to the Investment Company Institute, an industry trade group.
Duncan believes that for a repeat of 1987 to occur, thousands upon thousands of mutual-fund investors would have to dump their investments on the same day.
"The likelihood of that is almost zero," he said.
And even if investors did cash out of their mutual funds, Duncan believes fund managers would try to hold on to stock positions if possible, knowing the funds could suffer if the market quickly rebounded.
Whether the next crash occurs this year or some other time in the future, some market watchers think October is a natural month for market swoons.
"By mid to late October, you're getting into the fourth quarter, and people are starting to look at their year-end results and deciding whether they can bail out now and still look good for the year," Cheney said. "That's going to be as true now as it was (in 1987)."
Yet another constant involves whether investors can get scared, and what they'll do if they are.
"If there are danger signs brewing ... that make people very, very nervous, I don't see anything that could prevent the same kind of mood (as Black Monday's) from reappearing," Cheney said. "It's clear that you don't need a very concrete, cut-and-dried kind of trigger to make people stampede if they're in the mood to be stampeded."
According to Cheney, "the basic question is: 'Has human nature changed in 10 years?'"
His answer?
"No."
--Will Morton
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