Ten Years After Black Monday, Markets Are Stabler
New technology, regulations, and beefed-up customer service in place for small investors
NEW YORK — The battle cry of Wall Street is, "Never again!"
Financial houses are taking all possible steps to avoid the shocks that helped turn the market downturn of Oct. 19, 1987 into a crash, Wall Street's worst single-day ever.
The Dow Jones Industrial Average plunged 508 points. Half a trillion dollars in paper wealth disappeared. And the 23 percent decline was almost twice the percentage drop on Oct. 29, 1929, the famous crash that helped usher in the Great Depression of the 1930s.
"Black Monday" hit small investors particularly hard.
Subsequent inquiries confirmed what some average investors had suspected: They had borne much of the loss.
While many institutional investors were able to get out of the market as it began to unravel - thanks to computer "program trading" that accelerated the downturn - small investors often found it impossible to get through clogged phone lines to brokers.
Some vowed never to invest in stocks again.
Now, on the 10th anniversary of the crash, much has changed to put average investors on sounder footing. But if they are better prepared to navigate a crash, they are hardly cushioned against all risk of a repeat.
Changes since 1987 include:
* Major US investment offices have installed new, high-speed phone lines to handle customer calls.
* Customers are encouraged in informational literature to "hang tough" and not sell on the first sign of a downturn. They are also urged to avoid undue euphoria - a point hammered home by Federal Reserve Chairman Alan Greenspan last week.
* "Circuit breakers" and program-trading "collars" impede the computer-driven selling that accelerated the 1987 downturn. Exchanges can handle greater volume and are more interlinked to prevent one market from adversely affecting another.
* Redemption fees have been imposed at many mutual funds to slow down cashouts.
* Discount brokers, who provide instant, computer access to their clients, have taken a growing share of the brokerage business.
"Technology has changed dramatically since 1987," says Arnold Kaufman, editor of The Outlook, a financial review published by Standard & Poor's Corp.
Much trading now occurs on the Internet, allowing investors to bypass brokers and do their own computer trading. But the Net remains untested at handling heavy trading.
* Financial firms have beefed up customer service.
"We have an entire group of people - we call them the 'Fidelity Corporate Reserves' - who could be pressed into service" to help investors during a market meltdown, says Scott Beyerl of Fidelity.
The mutual-fund giant has expanded its customer-service force from 1,000 in 1990 to 2,500 today.
* On the investment side, Fidelity and other financial houses have boosted cash reserves. Many Fidelity mutual funds now hold 4 to 10 percent cash.
A manager now knows instantly how much cash he has, both for stock purchases and customer redemptions. Since 1990, Fidelity has also won approval from the Securities and Exchange Commission to have interfund borrowing - shifting cash, for example, from money market funds to equity funds. The company has also taken out special bank lines of credit to cover redemptions.
Vanguard, the No. 2 mutual-fund house, has taken similar steps.
Back in 1987, Vanguard's only customer-service office was at its headquarters. Now, Vanguard has created a special "hot site" there and has people in Phoenix and Charlotte, N.C. Customers are patched to the next available operator at any site.
Would investors, particularly mutual-fund investors, ride out another market downturn? Some statistical evidence suggests they might, particularly those in retirement accounts, says John Rea of the Investment Company Institute.
"Still, one can't help but be concerned that today's [trading] capacity, although greatly expanded, will prove insufficient," in event of another market crash, says Mr. Kaufman of S&P. "Market crashes repeatedly test new technologies."