Why do trading systems have a black background

BACKGROUND Computers made crash history 30 years ago

Frankfurt (Reuters) - The stock market crash in 1987 went down in history as “Black Monday”. The world has changed a lot since then, but there are striking parallels: Then as now, the stock exchanges were on record course.

In August 1987, the Dow Jones had reached a record high of 2,736 points before falling by almost 23 percent within a few hours on October 19. It is still the biggest crash of the post-war period.

It is worrying that elements from that time are recognizable in the current state of the financial markets, says Lucy O’Carroll, chief economist at asset manager Aberdeen Standard. "The ratings were as stretched back then as they are today." The price / earnings ratio (P / E) - an important indicator for assessing the price level - in the Dow Jones is currently just under 21. This means that the share prices of the companies listed there exceed earnings per share by an average of 21 times. The long-term average is 15.

The Dow Jones index with the US standard values ​​crossed the 23,000 point mark for the first time on Tuesday, the Dax is also on a record course and is currently almost 13,100 points. That is an increase of 1200 percent since its introduction in 1988. If you calculate the price development back to 1987, the minus of the German leading index on “Black Monday” was nine percent.

O’Carroll continues, although completely different factors determined retail in 1987. After all, the crash was not preceded by a decade in which central banks pumped trillions of dollars, euros and yen into the markets. “But the resulting weaknesses are comparable. With global equity markets hitting ever higher all-time highs, the markets may well be ripe for a rude awakening right now. " Even central bankers like ECB council member Ewald Nowotny warn of the danger of crashing, especially in the US markets, but are more relaxed about the European markets. The DAX's P / E ratio is currently 14, which is just below the long-term average.


Unlike after the attacks of September 11, 2001, there was no concrete trigger for the sales in 1987. The then President Ronald Reagan asserted that the country's economy was doing well. Donald Trump can say that these days without further ado. The then head of the New York Securities and Exchange Commission, David S. Ruder, said later that rising interest rates and a large trade deficit had contributed to the mass selling. The program trading - a kind of forerunner of today's algo trading - but have made everything worse.

“Fully automated trading systems are also blamed for other stock market crashes,” emphasizes James Bateman, chief investor at asset manager Fidelity. "Especially for the so-called‘ Flash Crash ’of 2010, in which the S&P 500 fell six percent in just 20 minutes."

In 1987 the order slips were still filled out by hand on the trading floor in Frankfurt. “We couldn't keep up with the sales orders,” recalls a stock exchange trader who was 26 at the time. “I went to my friend and said:‘ I think I lost a lot of money today. ’Then I opened a bottle of whiskey,” says another trader.


The stock exchange supervisors later drew up rules to be able to put sales programs in place - for example by interrupting trading in the event of high price fluctuations. Fidelity expert Bateman warns, however, that the power of the machines is not banished. "Since 1987, the proportion of transactions carried out with fully automated trading models on the American stock market has more than doubled from 13 percent to 27 percent today."

The events of October 19 in 1987 brought back memories of the historic crash of October 28, 1929 in many people, and like it became part of culture. For the grandchildren of the traders of yore, the stock exchange had been a one-way street up until then. Representing this generation of traders of the 1980s, the broker Sherman McCoy even felt himself to be the “Master of the Universe” in Tom Wolfe's novel “In Purgatory of Vanities”. Oliver Stone set another monument with the film “Wall Street”, in which Gordon Gekko did business according to his motto “Greed is good”. And the crash fright didn't last forever. In early 1989, the Dow Jones was back above its pre-crash level.