Market Reform Act of 1990

Oh, those naughty junk bonds. They got a bunch of people thrown into prison. (Or rather, their manipulative selling did.) They got lots of greedy-and-clueless investors (a dangerous combination) to loan money to corporations with little more than this process as their financial analysis.

Think of the 1980s savings and loan crisis as Banking Crisis #3 in our nation’s fine history of banking crises, with the 2008 mortgage crisis being #4: The Revenge.

Anyway, the S&L crisis, along with a highly leveraged stock market led to, uh, problems. How so, you ask?

Well, check out the S&P 500 stock chart from the 1980s. Yeah, quite a ride. And then, um...whoops. Yeah. Big whoops.

So what was this whoops? Well, a bunch of things happened. At the time, there were nearly no regulations on computer-driven trading. That is, computers were relatively new back then, believe it or not, as a staple on every desktop and near every commode...and the few program trading programs out there were pretty unsophisticated.

So the big whoops here? Well, a bunch of programs had built in a “risk protection system” that would limit losses should a down market happen. That market did happen...and it seemed as if everyone had the same program trades kick in. That is, "If my stock is down 3% from yesterday, sell half; if my stock goes down 5% from yesterday, sell all."

Or something like that.

And most of those sell orders were market orders, meaning that the computer sell instructions were to sell, regardless of volumes of shares being sought to be bought, i.e., no matching order volumes required. And to just sell at whatever the price proffered by the market was offering.

So what happened was that a core group of large-ish owners all hit the same panic buttons, and suddenly massive amounts of stock came on to the market, offered for sale, with no buyers down anything close to only 3 or 5%. So the stocks cratered, down some 20, 30, even 40% in many cases...over a very short period of time.

It was a mess. The markets survived though. And smart people decided that this system needed improvement. So in came the Market Reform Act of 1990, which basically for the first time curbed how the markets would function, and how program trading would be monitored, measured, metered, and regulated.

The act gave the governing bodies of the markets (namely, the SEC) the right to take over administration of the markets, and to prohibit blind block booked trading of securities, so that a repeat of that “whoops” doesn’t happen. Which is good, because if left unchecked, a whoops can easily become an “oopsies.”

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Finance: What is the Market Reform Act o...0 Views

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And finance Allah shmoop What is the market Reform Act

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of nineteen ninety Hold those naughty junk bonds They got

00:11

this guy thrown in prison They got lots of greedy

00:13

in't clueless investors A dangerous combination toe loan money The

00:17

corporations with little more than this process as their financial

00:21

analysis Well think of the nineteen eighties savings and loan

00:24

crisis as banking crisis number three in our nation's fine

00:28

history of banking crises with the two thousand eight mortgage

00:31

crisis being number four the revenge Anyway the S and

00:35

L crisis along with a highly leverage stock market led

00:37

Teo problems How so You ask Well check out the

00:41

S and P five hundred stock chart from while the

00:43

nineteen eighties Yeah quite a ride and then moves Yeah

00:46

big groups So what was this woops Well a bunch

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of things happen at the time There were nearly no

00:51

regulations on computer driven trading that his computers were relatively

00:55

new back then believe it or not as a staple

00:58

on every desktop and near every camo mode And well

01:01

the few program trading programs out there were pretty unsophisticated

01:05

So the big groups here well a bunch of programs

01:08

had a built in quote risk protection system unquote that

01:12

would limit losses should a downmarket happen And that market

01:15

did happen and it seemed as if everyone had the

01:18

same program trades kick in That is well if my

01:22

stock goes down three percent from yesterday were going to

01:25

sell half And if my stock goes down five percent

01:29

from yesterday were going to sell all yeah or something

01:31

like that And most of those sell orders were market

01:34

orders meaning that the computers cell instructions were to just

01:37

sell mortem herself Regardless of volumes of shares being sought

01:41

to be bought III there were no matching order volumes

01:45

required and the computers were told to just sell all

01:48

the shares at whatever the price was offered at the

01:51

time by the market So what happened was that a

01:53

core group of largish owners all hit the same panic

01:57

button at the same time and suddenly massive amounts of

02:00

supplies of stock came out onto the market offered for

02:03

sale with no buyers down anything close to only three

02:07

to five percent meaning the stocks cratered down some twenty

02:10

thirty even forty percent in a few hours in many

02:13

cases Yeah very short period of time Big losses It

02:17

was a mess The market's survived it though and smart

02:19

people decided that this system needed you know improvement So

02:23

in came the Market Reform Act of nineteen ninety which

02:25

basically for the first time curbed how the markets would

02:28

function and how program trading would be monitored measured metered

02:32

and essentially regulated The act gave the governing bodies of

02:35

the markets namely the SEC the right to take over

02:38

administration of the markets and to prohibit blind block booked

02:42

trading of securities so that a repeat of that woops

02:45

didn't happen again Which is good because well if left

02:48

unchecked Ai woops can easily become an oop sees which 00:02:52.048 --> [endTime] is way worse

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