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.”