Financial Markets:

Preliminary Observations on the October 1987 Crash

GGD-88-38: Published: Jan 26, 1988. Publicly Released: Jan 26, 1988.

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Pursuant to a congressional request, GAO examined aspects of the October 19, 1987, market crash, focusing on: (1) market evolution and interrelationships; (2) operating structure; (3) market regulation; (4) market internationalization; (5) the availability of adequate capital and liquidity; and (6) abusive sales and trading practices.

GAO found that: (1) a confluence of macroeconomic, political, psychological, and trading factors caused the crash; (2) the futures and securities markets have developed broad new trading interests and strategies, as well as intermarket and international links; (3) the market and regulatory systems performed relatively well in the face of unprecedented volumes and price changes; (4) backlogs in the New York Stock Exchange's automated system adversely affected trade executions and pricing information; (5) federal regulators and the exchanges responded to high volatility in the markets without the benefit of any formal intermarket contingency planning; and (6) no agency currently has responsibility for intermarket decisionmaking. GAO believes that: (1) the markets should reevaluate and improve their trading and information systems to ensure that they are capable of handling trading pressures; (2) regulatory agencies should develop integrated intermarket contingency plans to deal with market breaks; (3) federal agencies should develop an appropriate intermarket regulatory structure encompassing intermarket products and strategies, provision of adequate liquidity, and growth of international financial market links; and (4) congressional repeal of the Banking Act of 1933 could allow the merging of the securities and banking industries and emphasize the need for an appropriate regulatory structure for linked markets and industries.

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