Reminiscences of a Market Crash
30-years ago today (20th October 2017) the ASX followed the global markets into the abyss falling 25% on the open. It would go on to lose another 25% in the following weeks before grinding out a base and starting the hard road higher again.
Apart from losing twice my annual salary (from which my father bailed me out) I have some other memories worth sharing.
I was on the trading floor of the Sydney Futures Exchange on that fateful day. The interest rate markets opened first, exploding into a wild frenzy of trading. What many don’t realise is that it was the move in interest rates on that day that did considerable damage to banks and funds.
However, it was the Share Price Index (SPI) pit where all eyes focused.
The SPI normally traded a one point bid/offer spread, or $100 value back then. On this morning, before trading began, it was agreed by the pit traders they would make 50 point spreads, or $5,000.
It was not a day to make an error.
The other poignant memory was the physical removal of option traders at the open. You see, up until that day the easy money was made by selling out-the-money put options. The market had jumped 110% in the prior 12-months, almost in a straight line, so selling puts was akin to shooting fish in a barrel.
Or picking up peanuts in front of a steam roller as it turned out.
So these option traders had been bankrupted in a split second. They had nothing to lose and the exchange assumed they would attempt to trade themselves out of the hole and potentially place the integrity of the market in jeopardy.
So what can we learn from 1987?
Probably not a great deal. Navigating a bear market (such as 2007/08) is vastly different to a complete and sudden collapse like 1987. The takeaway is that keep leverage to modestly conservative levels, ignore the peanuts and accept that on occasion markets can crash.
