Following the 1929 stock market crash, investors and financial community professionals began to fear a repeat performance, and that fear threatened to materialize in October 2008, when the market began an extended slide and flirted with disaster. Economists and regulators have identified many causes of such slides and devised preventive measures to prevent another stock market collapse.
As 13 million shares traded on Black Thursday – October 24, 1929 – the stock ticker failed to keep up with the free fall. The resultant crash was attributed to inflated stock prices and marginal buying, with traders contributing only 10 percent of their own cash and borrowing the rest. To prevent economic collapse, President Herbert Hoover shepherded the enactment of the Smoot-Hawley Tariff to encourage overseas sales, but even that measure backfired.
The Securities and Exchange Commission
In 1934, the Securities and Exchange Commission was created to restore the public's trust in capital markets and to oversee the conduct of those markets. Among its many other duties, the SEC attempts to prevent market meltdowns by requiring transparency in the financial instruments being traded in the financial markets and also by regulating brokerage firms and self-regulatory organizations, including the major stock exchanges. It prohibits certain types of conduct, such as insider trading, and enforces laws that govern the financial industry.
After the 1929 stock market crash, trading days were cut back from six to five as one way to prevent another collapse. It took traders and investors time to adjust to a shortened trade week, but it’s now accepted practice to limit days and hours of trading and give trading a weekend break. These breaks haven’t affected overseas stock markets, and many world stock exchanges allow limited after-hours trading at the end of the regular trading day. In 2011, Singapore’s stock exchange eliminated employees’ 90-minute lunch break so trading could continue unabated from 9 a.m. to 5 p.m.
High frequency trading has been identified as a potential risk to market stability. “Time” magazine profiled the threat triggered by the speed at which supercomputers generate trades. At the heart of the matter is an industry push to lower trading costs while speeding up the process of trading. One remedy undertaken to address this danger is called “circuit breaker” -- a protocol initiated by the New York Stock Exchange in 2010 to short-circuit market panic. The brief pause in trading to give parties a chance to regroup backfired when it was used, as the short break triggered erratic activity on other exchanges. Nevertheless, it remains in place.
“Computer Weekly” profiled Apama’s Risk Firewall, software designed to monitor stock market activity in real time so mistakes and fraud capable of triggering stock market crashes are identified immediately. This software keeps up with algorithmic trading, commonplace within investment firms relying on technology to move trades along safely and briskly. Risk Firewall can stop automatic trading if rogue trading patterns or unidentified activities threaten to crash the market.
Based in Chicago, Gail Cohen has been a professional writer for more than 30 years. She has authored and co-authored 14 books and penned hundreds of articles in consumer and trade publications, including the Illinois-based "Daily Herald" newspaper. Her newest book, "The Christmas Quilt," was published in December 2011.