Saturday, 15 December 2007

The October 27th 1997 Mini-Crash.

The October 27th 1997 Mini-Crash.
By John Caldecott.

The mini-crash of 1997 is remembered better today for what didn’t happen than what did. For the first time in New

York Stock Exchange history, trading was halted for the day for the first time ever due to losses in stock prices.

What made this event so controversial is that the “circuit-breaker” system that was used for the first time that

day was run on the idea that once the market has lost a certain number of points, trading would be halted. This was

seen to be short-sighted since the actual percentage of value lost when trading was halted was relatively minor

compared to other market crashes and corrections in the past. The circuit breaker system has since been corrected

to only stop once 10 percent, 20 percent and finally 30 percent of the market value has been lost.

As is always the case with trading on the American stock markets, the ripple effect that would turn into a tidal

wave started with the Hong Kong market. The Hang Seng Index fell about six percent the night before, but many

experts in the US didn’t bear it much mind since the Nikkei average lost only two percent that same day. As markets

opened in Europe, they followed suit with their Asian counterparts, with the FTSE losing about 2 percent and the

DAX exchange in Frankfurt falling, as well.

As markets opened in the United States, most predicted a bad day, but no one predicted what ended up happening. The

NASDAQ, S&P and the Dow Jones all opened lower, and it was pretty much all down hill from there. Just after 2:30 in

the afternoon, the Dow had dropped 350 points, causing the first level of the “circuit-breaker” to go off, halting

trading. While a 350 point drop is significant, many did not feel a stoppage in trading was warranted at that time,

since a drop of that size is relatively small, percentage-wise. Thirty minutes later, trading began again, only to

see the 550 point window smashed around 3:30. This second circuit breaker level usually causes a one-hour break in

trading, but since there was only 30 or so minutes left, trading for the day was ended.

This correction was seen as a slight bump in what was otherwise a good year for the Dow. The 550 point drop was

just over a 7% loss for the day. It turned out to be the 12th biggest percentage loss in a single day in Dow

history and third biggest point loss.

Godbless, John Caldecott.

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