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MKT: 1987 Comparison



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I think when any discussion comparing 1987 to any market is done..one
factor that rarely gets mentioned was the $80 Billion dollars of money
that was committed to dynamic hedging.  Almost every postmortem of the
events of the 19th and 20th concluded that dynamic hedging contributed
to the event of those two days.  The processs forced the traders to buy
High and sell Low.  One could speculate forever on how much higher they
ran the market prior to 10/19/87, but anyone standing there watching the
event on 10/19/87 saw the dramatic impact they had fueling the decline.
Think about it...three guys with one commputer......situated in San
Francisco....controlling lots of money...probably(IMHO)accounted for
between 225 to 300 points of the decline.  Some people still argue that
they may have created all of the final decline because everytime it
rallied a bit on 10/19 they HAD to sell the futures.  Dynamic
hedging(replicating a put with futures)is somewhat less common today. 
It has not gone away but it is nothing like the $80 billion doing it in
1987.  People loved them on the way up, as they still do, and condemned
them on the way down.  Net net in the long run they probably provide a
bit of an upside bias too the market overall.  

If they hadn't been aroound in 1987 would we of had a crash?  How much
of the decline was related to their activities?

By the way I was once told that the worst performance of any of the DH
accounts was that it returned 0% for calander 1987.  Almost all of the
others actually had high single digit or low double digit returns.