Has anyone here traded a real stock market crash?

I'm 29 years old. Too young to have traded '87 or even the mini 98 crash, and too uninformed and stupid to have traded the dot com crash.

So how does it work? Throw a market order out to sell and get out of your longs, but get filled 5-10% off where you wanted to get filled? Total vaporization of liquidity? Or just *bam*, market halt, wait till next day, *bam*, market halt?

 

Not quite like that. Too dramatized. Throw a market order, get filled in less than a minute and get the price 5-10% away from the print?

Look it up yourself. The most recent one: Sept 15, 2008. See how the price moved intraday. The Dow started off with something like -300 point gap. And closed the day down more than 500 points. That was the start of the down move for months to come.

The event in 1987 was more severe. Dow dropped 500 points but percentage-wise back then it was something like -20% in one day.

The Dot Com crash didn't happen all in one day. It took weeks for the high flying stocks like QCOM, YHOO, AMZN (GOOG didn't exist back then) to come down significantly from their parabolic move to the top.

 

I'm 29.

I was trading ES during the near vertical fall in Oct. / Nov.

You could still get orders off.

The velocity was great...I've never seen the spooz move that quickly.

Just be careful of weekend events.

 

1987 flashback. Monday, 19 October 1987 the Dow Jones Industrial Average is way down about 10:00 AM following the big decrease Friday 16 October 1987. I remember telephoning my broker to buy stocks because I figure prices are way low. The broker does not answer the telephone for two hours.

Readers might keep that in mind when day trading with the internet. One day your big positions might be showing big losses, the internet might not work, and the broker might not answer the telephone.

 

Everything relies on technology now. There are no brokers, exchanges, clearing houses, etc. who have anywhere near enough staff to answer phones in the event of a serious system wide failure. If all systems are up and running then a “crash” should be handled relatively orderly. When I was a market maker there were a couple wild days in 97 and 98 where people panicked and the trading systems could not keep up. I remember sending a market order in an actively traded NYSE stock that took several minutes to get any report back. Basically you are trying to trade and you don’t really know where the stocks are and you have to wait what seems like an eternity to find out the status of your orders while the market drops like a stone. I was not there in 87 but I talked to people who were and it was really bad, traders who have never experienced things like that could scarcely imagine what it was like. There was a lot of complaining after each of these crashes and the exchanges upgraded their systems each time so they are in a much better position to handle them now. That is why things went surprisingly smoothly last year during those wild days.

Basically you don’t have to worry about it nearly as much anymore, but if you think your trading software will work or your broker will pick up the phone in the event of a large system failure then you are kidding yourself.

 

Technology and regulation have come a long way since '87 but there's no way of knowing whether it's enough to avoid the likes of '87 when the volume overwhelmed the system's capacity.

The DOW had dropped nearly 20 % from late August until Black Monday (2 months) and then it dropped almost another 20% that day. People were running for the doors. Market data was screwy because it was worse than a fast market. Brokers were unavailable for hours. Some couldn't tell for up to a week if option positions had been exercised (the previous Friday was option expiration).

Market orders made sense only if you were attempting to sell something way higher at a good price (a fantasy) or buy something way lower than the last quote. And even that good buy could be a lousy fill in mere minutes. Selling something with a market order was like playing Russian Roulette - you had no idea of what the fill would be.

Implied volatilty went sky high. Stock and option bid/ask spreads were Holland Tunnel wide. Transacting at any price was a shot in the dark. It was no picnic.

I'm not fear based but things looked really screwed up that day and first thing the next morning I went to the bank and withdrew $1,000 just in case the financial system got problematic but it didn't.

Then came the margin calls

 

I've traded through the 87, 97 and 98 crashes. Here's a pic of me in Time Magazine taken during the '97 crash. Jim Cramer was interviewed in this issue, lol. It was the first time I'd ever heard of him.

 

nice...man that must have been crazy.

 

It was a really weird "crash". It was literally a 1 day thing-like the DAX in the London bombings. If memory serves correctly the market made up those 1997 losses in a few days.

What I remember best about 1998 was not so much the "crash" but the October 15th surprise rate cut in response. Occasionally the CBOT would ask me and a few other traders to put on a "mock trading" seminar for visitors. Usually a group of farmers or students. We'd do it in the Bond pit after the close. On this day it was U of Chicago MBA's. The only contract still in session was the Dow which traded in the far corner of the room. All of a sudden the Dow pit went up for grabs. RATE CUT! The stuff rallied like 550 points-an absolutely unparalleled up move-in about two minutes. I can assure you it was better to observe it than short it, lol. Pabst also hooked up with some tender MBAette that night...

 

My favourite read covering trading during crashes is the autobiography of Marty Schwartz, Pit Bull. Marty Schwartz is also interviewed in Market Wizards.

If I remember rightly, he was the trader willing to step in and buy when Soros was puking up a huge long position when there were no other buyers.

From a trend followers perspective, it is difficult to be on the wrong side of a crash, as crashes rarely happen overnight. For example, the price action leading up to the October 87 crash would result in any trend follower being short the S&P. Trend followers don't trade crashes, they sit back and enjoy them!

First post, fell free to flame!