Market Reform Act of 1990
Categories: Ethics/Morals, Regulations, Bonds
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.”
Related or Semi-related Video
Finance: What is the Market Reform Act o...0 Views
And finance Allah shmoop What is the market Reform Act
of nineteen ninety Hold those naughty junk bonds They got
this guy thrown in prison They got lots of greedy
in't clueless investors A dangerous combination toe loan money The
corporations with little more than this process as their financial
analysis Well think of the nineteen eighties savings and loan
crisis as banking crisis number three in our nation's fine
history of banking crises with the two thousand eight mortgage
crisis being number four the revenge Anyway the S and
L crisis along with a highly leverage stock market led
Teo problems How so You ask Well check out the
S and P five hundred stock chart from while the
nineteen eighties Yeah quite a ride and then moves Yeah
big groups So what was this woops Well a bunch
of things happen at the time There were nearly no
regulations on computer driven trading that his computers were relatively
new back then believe it or not as a staple
on every desktop and near every camo mode And well
the few program trading programs out there were pretty unsophisticated
So the big groups here well a bunch of programs
had a built in quote risk protection system unquote that
would limit losses should a downmarket happen And that market
did happen and it seemed as if everyone had the
same program trades kick in That is well if my
stock goes down three percent from yesterday were going to
sell half And if my stock goes down five percent
from yesterday were going to sell all yeah or something
like that And most of those sell orders were market
orders meaning that the computers cell instructions were to just
sell mortem herself Regardless of volumes of shares being sought
to be bought III there were no matching order volumes
required and the computers were told to just sell all
the shares at whatever the price was offered at the
time by the market So what happened was that a
core group of largish owners all hit the same panic
button at the same time and suddenly massive amounts of
supplies of stock came out onto the market offered for
sale with no buyers down anything close to only three
to five percent meaning the stocks cratered down some twenty
thirty even forty percent in a few hours in many
cases Yeah very short period of time Big losses It
was a mess The market's survived it though and smart
people decided that this system needed you know improvement So
in came the Market Reform Act of nineteen ninety which
basically for the first time curbed how the markets would
function and how program trading would be monitored measured metered
and essentially 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 woops
didn't happen again Which is good because well if left
unchecked Ai woops can easily become an oop sees which 00:02:52.048 --> [endTime] is way worse