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25 years after Black Monday, what lessons are learned

Dan Bobkoff Oct 19, 2012
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Twenty-five years ago, John Herzog was on the trading floor of his firm Herzog Heine Geduld when the floor fell out of the Dow.

“Every phone ringing, every trader screaming,” he recalled.

Herzog’s father had always warned him that 1929 could happen again. And, that day, that’s how it felt.

“The fear and trembling that comes into your stomach when you experience something like this is something you cannot forget,” Herzog said.

Most experts say the 1987 crash was caused by a few things: interest rate squabbles with other countries, the rise of computerized Program Trading, and something called Portfolio Insurance, a way of hedging bets.

Things are not too different today, says Professor Richard Sylla of NYU. Derivatives and other strategies have taken the place of portfolio insurance. And computers do even more of our trading.

“I think this is a problem for Wall Street,” Sylla said. “It hasn’t really taken to heart that the computers can cause more problems than they solve.”

Remember the flash crash two years ago? That’s when computer trades spurred a short-lived market tumble.

“Wall Street, the program traders and the exchanges, should also be questioning some of the assumptions that go into trading strategies today,” Sylla said.

It was on Black Monday that trader John Herzog thought we’d see fewer crashes if people understood the market better. He decided to create a whole museum on finance to help reach that goal, but, he says we could always see another crash like that one.

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