Global equity market

A stock market or equity market is a public (a loose network of economic

transactions, not a physical facility or discrete) entity for the trading of company
stock (shares) and derivatives at an agreed price; these are securities listed on a
stock exchange as well as those only traded privately.

The size of the world stock market was estimated at about $36.6 trillion at the start
of October 2008. The total world derivatives market has been estimated at about
$791 trillion face or nominal value, 11 times the size of the entire world economy.
[3]
The value of the derivatives market, because it is stated in terms of notional
values, cannot be directly compared to a stock or a fixed income security, which
traditionally refers to an actual value. Moreover, the vast majority of derivatives
'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a
comparable derivative 'bet' on the event not occurring). Many such relatively
illiquid securities are valued as marked to model, rather than an actual market
price.

The stocks are listed and traded on stock exchanges which are entities of a
corporation or mutual organization specialized in the business of bringing buyers
and sellers of the organizations to a listing of stocks and securities together. The
largest stock market in the United States, by market cap, is the New York Stock
Exchange, NYSE. In Canada, the largest stock market is the Toronto Stock
Exchange. Major European examples of stock exchanges include the London Stock
Exchange, Paris Bourse, and the Deutsche Börse (Frankfurt Stock Exchange).
Asian examples include the Tokyo Stock Exchange, the Hong Kong Stock
Exchange, the Shanghai Stock Exchange, and the Bombay Stock Exchange. In
Latin America, there are such exchanges as the BM&F Bovespa and the BMV.
Trading

The London Stock Exchange.

Participants in the stock market range from small individual stock investors to
large hedge fund traders, who can be based anywhere. Their orders usually end up
with a professional at a stock exchange, who executes the order.

Some exchanges are physical locations where transactions are carried out on a
trading floor, by a method known as open outcry. This type of auction is used in
stock exchanges and commodity exchanges where traders may enter "verbal" bids
and offers simultaneously. The other type of stock exchange is a virtual kind,
composed of a network of computers where trades are made electronically via
traders.

Actual trades are based on an auction market model where a potential buyer bids a
specific price for a stock and a potential seller asks a specific price for the stock.
(Buying or selling at market means you will accept any ask price or bid price for
the stock, respectively.) When the bid and ask prices match, a sale takes place, on a
first-come-first-served basis if there are multiple bidders or askers at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities between

buyers and sellers, thus providing a marketplace (virtual or real). The exchanges
provide real-time trading information on the listed securities, facilitating price
discovery.
Market participants
A few decades ago, worldwide, buyers and sellers were individual investors, such
as wealthy businessmen, usually with long family histories to particular
corporations. Over time, markets have become more "institutionalized"; buyers and
sellers are largely institutions (e.g., pension funds, insurance companies, mutual
funds, index funds, exchange-traded funds, hedge funds, investor groups, banks
and various other financial institutions).

The rise of the institutional investor has brought with it some improvements in
market operations. Thus, the government was responsible for "fixed" (and
exorbitant) fees being markedly reduced for the 'small' investor, but only after the
large institutions had managed to break the brokers' solid front on fees. (They then
went to 'negotiated' fees, but only for large institutions.[citation needed])

However, corporate governance (at least in the West) has been very much
adversely affected by the rise of (largely 'absentee') institutional 'owners'

History

The Bombay Stock Exchange

Established in 1875, the Bombay Stock Exchange is Asia's first stock exchange.
In 12th century France the courratiers de change were concerned with managing
and regulating the debts of agricultural communities on behalf of the banks.
Because these men also traded with debts, they could be called the first brokers.

A common misbelief is that in late 13th century Bruges commodity traders

gathered inside the house of a man called Van der Beurze, and in 1309 they
became the "Brugse Beurse", institutionalizing what had been, until then, an
informal meeting, but actually, the family Van der Beurze had a building in
Antwerp where those gatherings occurred;[6] the Van der Beurze had Antwerp, as
most of the merchants of that period, as their primary place for trading. The idea
quickly spread around Flanders and neighboring counties and "Beurzen" soon
opened in Ghent and Amsterdam.

In the middle of the 13th century, Venetian bankers began to trade in government
securities. In 1351 the Venetian government outlawed spreading rumors intended
to lower the price of government funds. Bankers in Pisa, Verona, Genoa and
Florence also began trading in government securities during the 14th century. This
was only possible because these were independent city states not ruled by a duke
but a council of influential citizens. The Dutch later started joint stock companies,
which let shareholders invest in business ventures and get a share of their profits –
or losses. In 1602, the Dutch East India Company issued the first share on the
Amsterdam Stock Exchange. It was the first company to issue stocks and bonds.

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been
the first stock exchange to introduce continuous trade in the early 17th century.
The Dutch "pioneered short selling, option trading, debt-equity swaps, merchant
banking, unit trusts and other speculative instruments, much as we know them".[7]
There are now stock markets in virtually every developed and most developing
economies, with the world's biggest market being in the United States, United
Kingdom, Japan, India, China, Canada, Germany's (Frankfurt Stock Exchange),
France, South Korea and the Netherlands
The New York Stock Exchange.

The New York Stock Exchange is a physical exchange, also referred to as a listed
exchange – only stocks listed with the exchange may be traded. Orders enter by
way of exchange members and flow down to a floor broker, who goes to the floor
trading post specialist for that stock to trade the order. The specialist's job is to
match buy and sell orders using open outcry. If a spread exists, no trade
immediately takes place—in this case the specialist should use his/her own
resources (money or stock) to close the difference after his/her judged time. Once a
trade has been made the details are reported on the "tape" and sent back to the
brokerage firm, which then notifies the investor who placed the order. Although
there is a significant amount of human contact in this process, computers play an
important role, especially for so-called "program trading".

The NASDAQ is a virtual listed exchange, where all of the trading is done over a
computer network. The process is similar to the New York Stock Exchange.
However, buyers and sellers are electronically matched. One or more NASDAQ
market makers will always provide a bid and ask price at which they will always
purchase or sell 'their' stock

The Paris Bourse, now part of Euronext, is an order-driven, electronic stock

exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an
open outcry exchange. Stockbrokers met on the trading floor or the Palais
Brongniart. In 1986, the CATS trading system was introduced, and the order
matching process was fully automated.
From time to time, active trading (especially in large blocks of securities) have
moved away from the 'active' exchanges. Securities firms, led by UBS AG,
Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of
U.S. security trades away from the exchanges to their internal systems. That share
probably will increase to 18 percent by 2010 as more investment banks bypass the
NYSE and NASDAQ and pair buyers and sellers of securities themselves,
according to data compiled by Boston-based Aite Group LLC, a brokerage-
industry consultant.

Now that computers have eliminated the need for trading floors like the Big
Board's, the balance of power in equity markets is shifting. By bringing more
orders in-house, where clients can move big blocks of stock anonymously, brokers
pay the exchanges less in fees and capture a bigger share of the $11 billion a year
that institutional investors pay in trading commissions as well as the surplus of the
century had taken place.

NASDAQ in Times Square, New York City.

From experience we know that investors may 'temporarily' move financial prices
away from their long term aggregate price 'trends'. (Positive or up trends are
referred to as bull markets; negative or down trends are referred to as bear
markets.) Over-reactions may occur—so that excessive optimism (euphoria) may
drive prices unduly high or excessive pessimism may drive prices unduly low.
Economists continue to debate whether financial markets are 'generally' efficient.

According to one interpretation of the efficient-market hypothesis (EMH), only

changes in fundamental factors, such as the outlook for margins, profits or
dividends, ought to affect share prices beyond the short term, where random 'noise'
in the system may prevail. (But this largely theoretic academic viewpoint—known
as 'hard' EMH—also predicts that little or no trading should take place, contrary to
fact, since prices are already at or near equilibrium, having priced in all public
knowledge.) The 'hard' efficient-market hypothesis is sorely tested by such events
as the stock market crash in 1987, when the Dow Jones index plummeted 22.6
percent—the largest-ever one-day fall in the United States.

This event demonstrated that share prices can fall dramatically even though, to this
day, it is impossible to fix a generally agreed upon definite cause: a thorough
search failed to detect any 'reasonable' development that might have accounted for
the crash. (But note that such events are predicted to occur strictly by chance,
although very rarely.) It seems also to be the case more generally that many price
movements (beyond that which are predicted to occur 'randomly') are not
occasioned by new information; a study of the fifty largest one-day share price
movements in the United States in the post-war period seems to confirm this.

However, a 'soft' EMH has emerged which does not require that prices remain at or
near equilibrium, but only that market participants not be able to systematically
profit from any momentary market 'inefficiencies'. Moreover, while EMH predicts
that all price movement (in the absence of change in fundamental information) is
random (i.e., non-trending), many studies have shown a marked tendency for the
stock market to trend over time periods of weeks or longer. Various explanations
for such large and apparently non-random price movements have been
promulgated. For instance, some research has shown that changes in estimated
risk, and the use of certain strategies, such as stop-loss limits and Value at Risk
limits, theoretically could cause financial markets to overreact. But the best
explanation seems to be that the distribution of stock market prices is non-
Gaussian (in which case EMH, in any of its current forms, would not be strictly
applicable).

Other research has shown that psychological factors may result in exaggerated
(statistically anomalous) stock price movements (contrary to EMH which assumes
such behaviors 'cancel out'). Psychological research has demonstrated that people
are predisposed to 'seeing' patterns, and often will perceive a pattern in what is, in
fact, just noise. (Something like seeing familiar shapes in clouds or ink blots.) In
the present context this means that a succession of good news items about a
company may lead investors to overreact positively (unjustifiably driving the price
up). A period of good returns also boosts the investor's self-confidence, reducing
his (psychological) risk threshold.

Another phenomenon—also from psychology—that works against an objective

assessment is group thinking. As social animals, it is not easy to stick to an opinion
that differs markedly from that of a majority of the group. An example with which
one may be familiar is the reluctance to enter a restaurant that is empty; people
generally prefer to have their opinion validated by those of others in the group.

In one paper the authors draw an analogy with gambling.[13] In normal times the
market behaves like a game of roulette; the probabilities are known and largely
independent of the investment decisions of the different players. In times of market
stress, however, the game becomes more like poker (herding behavior takes over).
The players now must give heavy weight to the psychology of other investors and
how they are likely to react psychologically.

The stock market, as with any other business, is quite unforgiving of amateurs.
Inexperienced investors rarely get the assistance and support they need. In the
period running up to the 1987 crash, less than 1 percent of the analyst's
recommendations had been to sell (and even during the 2000–2002 bear market,
the average did not rise above 5 %%). In the run up to 2000, the media amplified
the general euphoria, with reports of rapidly rising share prices and the notion that
large sums of money could be quickly earned in the so-called new economy stock
market. (And later amplified the gloom which descended during the 2000–2002
bear market, so that by summer of 2002, predictions of a DOW average below
5000 were quite common.)
Market trends

A market trend is a putative tendency of a financial market to move in a

particular direction over time.[1] These trends are classified as secular for long time
frames, primary for medium time frames, and secondary lasting short times.[2]
Traders identify market trends using technical analysis, a framework which
characterizes market trends as a predictable price response of the market at levels
of price support and price resistance, varying over time.

The terms bull market and bear market describe upward and downward market
trends, respectively, and can be used to describe either the market as a whole or
specific sectors and securities.[3]

secular market trend

A secular market trend is a long-term trend that lasts 5 to 25 years and consists of a
series of sequential primary trends. A secular bear market consists of smaller bull
markets and larger bear markets; a secular bull market consists of larger bull
markets and smaller bear markets.

In a secular bull market the prevailing trend is "bullish" or upward moving. The
United States stock market was described as being in a secular bull market from
about 1983 to 2000 (or 2007), with brief upsets including the crash of 1987 and the
dot-com bust of 2000–2002.

In a secular bear market, the prevailing trend is "bearish" or downward moving. An

example of a secular bear market was seen in gold during the period between
January 1980 to June 1999, culminating with the Brown Bottom. During this
period the nominal gold price fell from a high of $850/oz ($30/g) to a low of
$253/oz ($9/g),[4] and became part of the Great Commodities Depression.

Secondary market trend

Secondary trends are short-term changes in price direction within a primary trend.
The duration is a few weeks or a few months.

One type of secondary market trend is called a market correction. A correction is a

short term price decline of 5% to 20% or so.[5] A correction is a downward
movement that is not large enough to be a bear market (ex post).

Another type of secondary trend is called a bear market rally (or "sucker's rally")
which consist of a market price increase of 10% to 20%. A bear market rally is an
upward movement that is not large enough to be a bull market (ex post). Bear
market rallies occurred in the Dow Jones index after the 1929 stock market crash
leading down to the market bottom in 1932, and throughout the late 1960s and
early 1970s. The Japanese Nikkei 225 has been typified by a number of bear
market rallies since the late 1980s while experiencing an overall long-term
downward trend.

Primary market trend

A primary trend has broad support throughout the entire market (most sectors) and
lasts for a year or more.

Bull market
A bull market is associated with increasing investor confidence, and increased
investing in anticipation of future price increases (capital gains). A bullish trend in
the stock market often begins before the general economy shows clear signs of
recovery. It is a win-win situation for the investors.

Examples
India's Bombay Stock Exchange Index, SENSEX, was in a bull market trend for
about five years from April 2003 to January 2008 as it increased from 2,900 points
to 21,000 points. A notable bull market was in the 1990s and most of the 1980s
when the U.S. and many other stock markets rose; the end of this time period sees
the dot-com bubble.

Bear market
A bear market is a general decline in the stock market over a period of time.[6] It is
a transition from high investor optimism to widespread investor fear and
pessimism. According to The Vanguard Group, "While there’s no agreed-upon
definition of a bear market, one generally accepted measure is a price decline of
20% or more over at least a two-month period."[7] It is sometimes referred to as
"The Heifer Market" due to the paradox with the above subject.

Examples
A bear market followed the Wall Street Crash of 1929 and erased 89% (from 386
to 40) of the Dow Jones Industrial Average's market capitalization by July 1932,
marking the start of the Great Depression. After regaining nearly 50% of its losses,
a longer bear market from 1937 to 1942 occurred in which the market was again
cut in half. Another long-term bear market occurred from about 1973 to 1982,
encompassing the 1970s energy crisis and the high unemployment of the early
1980s. Yet another bear market occurred between March 2000 and October 2002.
The most recent example occurred between October 2007 and March 2009.

Market top
A market top (or market high) is usually not a dramatic event. The market has
simply reached the highest point that it will, for some time (usually a few years). It
is retroactively defined as market participants are not aware of it as it happens. A
decline then follows, usually gradually at first and later with more rapidity.
William J. O'Neil and company report that since the 1950s a market top is
characterized by three to five distribution days in a major market index occurring
within a relatively short period of time. Distribution is a decline in price with
higher volume than the preceding session.

Examples
The peak of the dot-com bubble (as measured by the NASDAQ-100) occurred on
March 24, 2000. The index closed at 4,704.73 and has not since returned to that
level. The NASDAQ peaked at 5,132.50 and the S&P 500 at 1525.20.

A recent peak for the broad U.S. market was October 9, 2007. The S&P 500 index
closed at 1,576 and the NASDAQ at 2861.50.

Market bottom
A market bottom is a trend reversal, the end of a market downturn, and precedes
the beginning of an upward moving trend (bull market).

It is very difficult to identify a bottom (referred to by investors as "bottom

picking") while it is occurring. The upturn following a decline is often short-lived
and prices might resume their decline. This would bring a loss for the investor who
purchased stock(s) during a misperceived or "false" market bottom.

Baron Rothschild is said to have advised that the best time to buy is when there is
"blood in the streets", i.e., when the markets have fallen drastically and investor
sentiment is extremely negative.

Examples
Some examples of market bottoms, in terms of the closing values of the Dow Jones
Industrial Average (DJIA) include:

 The Dow Jones Industrial Average hit a bottom at 1738.74 on 19 October

1987, as a result of the decline from 2722.41 on 25 August 1987. This day
was called Black Monday .
 A bottom of 7286.27 was reached on the DJIA on 9 October 2002 as a result
of the decline from 11722.98 on 14 January 2000. This included an
intermediate bottom of 8235.81 on 21 September 2001 (a 14% change from
10 September) which led to an intermediate top of 10635.25 on 19 March
2002 . The "tech-heavy" NASDAQ fell a more precipitous 79% from its
5132 peak (10 March 2000) to its 1108 bottom (10 October 2002).

 A decline associated with the subprime mortgage crisis starting at 14164.41

on 9 October 2007 (DJIA) and caused a bottom of 6,440.08 on 9 March
2009 .
Investor sentiment
Investor sentiment is a contrarian stock market indicator.

By definition, the market balances buyers and sellers, so it's impossible to literally
have 'more buyers than sellers' or vice versa, although that is a common
expression. The market comprises investors and traders. The investors may own a
stock for many years; traders put on a position for several weeks down to seconds.

Generally, the investors follow a buy low sell high strategy.[12] Traders attempt to
"fade" the investors' actions (buy when they are selling, sell when they are buying).
A surge in demand from investors lifts the traders' asks, while a surge in supply
hits the traders' bids.

When a high proportion of investors express a bearish (negative) sentiment, some

analysts consider it to be a strong signal that a market bottom may be near. The
predictive capability of such a signal (see also market sentiment) is thought to be
highest when investor sentiment reaches extreme values.[13] Indicators that measure
investor sentiment may include:[citation needed]

 Investor Intelligence Sentiment Index: If the Bull-Bear spread (% of Bulls

- % of Bears) is close to a historic low, it may signal a bottom. Typically, the
number of bears surveyed would exceed the number of bulls. However, if
the number of bulls is at an extreme high and the number of bears is at an
extreme low, historically, a market top may have occurred or is close to
occurring. This contrarian measure is more reliable for its coincidental
timing at market lows than tops.
 American Association of Individual Investors (AAII) sentiment indicator:
Many feel that the majority of the decline has already occurred once this
indicator gives a reading of minus 15% or below.
 Other sentiment indicators include the Nova-Ursa ratio, the Short
Interest/Total Market Float, and the Put/Call ratio.

Market capitulation
Market capitulation refers to the threshold reached after a severe fall in the market,
when large numbers of investors can no longer tolerate the financial losses
incurred. These investors then capitulate (give up) and sell in panic, or find that
their pre-set sell stops have been triggered, thereby automatically liquidating their
holdings in a given stock. This may trigger a further decline in the stock's price, if
not already anticipated by the market. Margin calls and mutual fund and hedge
fund redemptions significantly contribute to capitulations.

The contrarians consider a capitulation a sign of a possible bottom in prices. This is

because almost everyone who wanted (or was forced) to sell stock has already
done so, leaving the buyers in the market, and they are expected to drive the prices
up.

The peak in volume may precede an actual bottom.

Changes with consumer behavior

Market trends are fluctuated on the demographics and technology. In a micro
economical view, the current state of consumer trust in spending will vary the
circulation of currency. In a micro economical view, demographics within a market
will change the advancement of businesses and companies. With the introduction
of the internet, consumers have access to different vendors as well as substitute
products and services changing the direction of which a market will go.

Despite that it is believed that market trends follow one direction over a matter of
time, there are many different factors that change can change this idea. Technology
s-curves, explained in the book The Innovator's Dilemma, states that technology
will start slow then increase in users once better understood but level off once
another technology replaces it, proving that change in the market is actually
consistent.
Etymology

The precise origin of the phrases "bull market" and "bear market" are obscure. The
Oxford English Dictionary cites an 1891 use of the term "bull market". In French
"bulle spéculative" refers to a speculative market bubble. The Online Etymology
Dictionary relates the word "bull" to "inflate, swell", and dates its stock market
connotation to 1714.

One hypothetical etymology points to London bearskin "jobbers" (market makers),

who would sell bearskins before the bears had actually been caught in
contradiction of the proverb ne vendez pas la peau de l'ours avant de l’avoir tué
("don't sell the bearskin before you've killed the bear")—an admonition against
over-optimism. By the time of the South Sea Bubble of 1721, the bear was also
associated with short selling; jobbers would sell bearskins they did not own in
anticipation of falling prices, which would enable them to buy them later for an
additional profit.

Another plausible origin is from the word "bulla" which means bill, or contract.
When a market is rising, holders of contracts for future delivery of a commodity
see the value of their contract increase. However in a falling market, the
counterparties—the "bearers" of the commodity to be delivered—win because they
have locked in a future delivery price that is higher than the current price.

Some analogies that have been used as mnemonic devices:

 Bull is short for 'bully', in its now mostly obsolete meaning of 'excellent'.
 It relates to the common use of these animals in blood sport, i.e. bear-baiting
and bull-baiting.
 It refers to the way that the animals attack: a bull attacks upwards with its
horns, while a bear swipes downwards with its paws.
 It relates to the speed of the animals: bulls usually charge at very high speed
whereas bears normally are thought of as lazy and cautious movers—a
misconception because a bear, under the right conditions, can outrun a horse.

 They were originally used in reference to two old merchant banking
families, the Barings and the Bulstrodes.
 Bears hibernate, while bulls do not.
 The word "bull" plays off the market's returns being "full" whereas "bear"
alludes to the market's returns being "bare".
In describing financial market behavior, the largest group of market participants is
often referred to, metaphorically, as the herd. This is especially relevant to
participants in bull markets since bulls are herding animals. A bull market is also
sometimes described as a bull run. Dow Theory attempts to describe the character
of these market movements.[17]

International sculpture team Mark and Diane Weisbeck were chosen to re-design
Wall Street's Bull Market. Their winning sculpture, the "Bull Market Rocket" was
chosen as the modern, 21st century symbol of the up-trending Bull Market

Black Monday (1987)

n finance, Black Monday refers to Monday, 19 October 1987, when stock markets
around the world crashed, shedding a huge value in a very short time. The crash
began in Hong Kong, spread west through international time zones to Europe,
hitting the United States after other markets had already declined by a significant
margin. The Dow Jones Industrial Average (DJIA) dropped by 508 points to
1738.74 (22.61%).
Losses
By the end of October, stock markets in Hong Kong had fallen 45.5%, Australia
41.8%, Spain 31%, the United Kingdom 26.45%, the United States 22.68%, and
Canada 22.5%. New Zealand's market was hit especially hard, falling about 60%
from its 1987 peak, and taking several years to recover. (The terms Black Monday
and Black Tuesday are also applied to October 28 and 29, 1929, which occurred
after Black Thursday on October 24, which started the Stock Market Crash of
1929. In Australia and New Zealand the 1987 crash is also referred to as Black
Tuesday because of the time zone difference.)

The Black Monday decline was the largest one-day percentage decline in stock
market history. Other large declines have occurred after periods of market closure,
such as, in the USA, on Monday, September 17, 2001, the first day that the US
market was open following the September 11, 2001 attacks. (Saturday, December
12, 1914, is sometimes erroneously cited as the largest one-day percentage decline
of the DJIA. In reality, the ostensible decline of 24.39% was created retroactively
by a redefinition of the DJIA in 1916.)

Interestingly, the DJIA was positive for the 1987 calendar year. It opened on
January 2, 1987, at 1,897 points and would close on December 31, 1987, at 1,939
points. The DJIA did not regain its August 25, 1987 closing high of 2,722 points
until almost two years later.

Mysteries
A degree of mystery is associated with the 1987 crash.

Important assumptions concerning human rationality, the efficient-market

hypothesis, and economic equilibrium were brought into question by the event.
Debate as to the cause of the crash still continues many years after the event, with
no firm conclusions reached.

In the wake of the crash, markets around the world were put on restricted trading
primarily because sorting out the orders that had come in was beyond the computer
technology of the time. This also gave the Federal Reserve and other central banks
time to pump liquidity into the system to prevent a further downdraft. While
pessimism reigned, the DJIA bottomed on October 20.
Following the stock market crash, a group of 33 eminent economists from various
nations met in Washington, D.C. in December 1987, and collectively predicted that
“the next few years could be the most troubled since the 1930s”.[7] In fact, calendar
year 1987 had an overall gain, as did 1988 and 1989.

Timeline
Timeline compiled by the Federal Reserve.

In 1986, the United States economy began shifting from a rapidly growing
recovery to a slower growing expansion, which resulted in a "soft landing" as the
economy slowed and inflation dropped. The stock market advanced significantly,
with the Dow peaking in August 1987 at 2722 points, or 44% over the previous
year's closing of 1895 points.

On October 14, the DJIA dropped 95.46 points (a then record) to 2412.70, and fell
another 58 points the next day, down over 12% from the August 25 all-time high.
On Friday, October 16, when all the markets in London were unexpectedly closed
due to the Great Storm of 1987, the DJIA closed down another 108.35 points to
close at 2246.74 on record volume. Treasury Secretary James Baker stated
concerns about the falling prices. That weekend many investors worried over their
stock investments.

The crash began in Far Eastern markets the morning of October 19. Later that
morning, two U.S. warships shelled an Iranian oil platform in the Persian Gulf in
response to Iran's Silkworm missile attack on the U.S. flagged ship MV Sea Isle
City.[8]

In the UK, future British prime minister Tony Blair appeared on the BBC to speak
about the crash as the City spokesperson for the opposition Labour party.[9]
Causes
Potential causes for the decline include program trading, overvaluation, illiquidity,
and market psychology.

The most popular explanation for the 1987 crash was selling by program traders.[10]
U.S. Congressman Edward J. Markey, who had been warning about the possibility
of a crash, stated that "Program trading was the principal cause."[11] In program
trading, computers perform rapid stock executions based on external inputs, such
as the price of related securities. Common strategies implemented by program
trading involve an attempt to engage in arbitrage and portfolio insurance strategies.
The trader Paul Tudor Jones predicted and profited from the crash, attributing it to
portfolio insurance derivatives which were "an accident waiting to happen" and
that the "crash was something that was imminently forecastable". Once the market
started going down, the writers of the derivatives were "forced to sell on every
down-tick" so the "selling would actually cascade instead of dry up".

As computer technology became more available, the use of program trading grew
dramatically within Wall Street firms. After the crash, many blamed program
trading strategies for blindly selling stocks as markets fell, exacerbating the
decline. Some economists theorized the speculative boom leading up to October
was caused by program trading, and that the crash was merely a return to
normalcy. Either way, program trading ended up taking the majority of the blame
in the public eye for the 1987 stock market crash.

New York University's Richard Sylla divides the causes into macroeconomic and
internal reasons. Macroeconomic causes included international disputes about
foreign exchange and interest rates, and fears about inflation.

The internal reasons included innovations with index futures and portfolio
insurance. I've seen accounts that maybe roughly half the trading on that day was a
small number of institutions with portfolio insurance. Big guys were dumping their
stock. Also, the futures market in Chicago was even lower than the stock market,
and people tried to arbitrage that. The proper strategy was to buy futures in
Chicago and sell in the New York cash market. It made it hard -- the portfolio
insurance people were also trying to sell their stock at the same time.

Economist Richard Roll believes the international nature of the stock market
decline contradicts the argument that program trading was to blame. Program
trading strategies were used primarily in the United States, Roll writes. Markets
where program trading was not prevalent, such as Australia and Hong Kong,
would not have declined as well, if program trading was the cause. These markets
might have been reacting to excessive program trading in the United States, but
Roll indicates otherwise. The crash began on October 19 in Hong Kong, spread
west to Europe, and hit the United States only after Hong Kong and other markets
had already declined by a significant margin.

Another common theory states that the crash was a result of a dispute in monetary
policy between the G7 industrialized nations, in which the United States, wanting
to prop up the dollar and restrict inflation, tightened policy faster than the
Europeans. U.S. pressure on Germany to change its monetary policy was one of
the factors that unnerved investors in the run-up to the crash. The crash, in this
view, was caused when the dollar-backed Hong Kong stock exchange collapsed,
and this caused a crisis in confidence.

Some technical analysts claim that the cause was the collapse of the US and
European bond markets, which caused interest-sensitive stock groups like savings
& loans and money center banks to plunge as well. This is a well documented
inter-market relationship: turns in bond markets affect interest-rate-sensitive
stocks, which in turn lead the general stock market turns.