What Happened On Black Monday, From A NYSE Floor Trader Who Was There

Kenny Polcari remembers October 19, 1987, like it was yesterday.

That’s because it was Black Monday, and Polcari was on the New York Stock Exchange trading floor watching it all unfold. He recently joined Benzinga’s #PreMarket Prep to talk about his experience watching the stock market crash.

The Sell Side

Polcari was 26 years old when it happened, and he had only been a member of the NYSE trading floor for a year and a half. He recalled that markets had come under extreme pressure the previous week, where the U.S. equities market closed on lows with heavier volume.

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"I remember saying to my wife, ‘Something just doesn’t feel right. I’ve never seen this before,’" Polcari said. “Granted, I was 26, so I hadn’t seen a lot.”

Polcari got up and traveled to work like he did every Monday, reading the newspaper on the train ride in. Meanwhile, markets worldwide were collapsing on themselves.

“The Asian markets had started to crack. Then the European markets started to crack. And then over here, on that morning, when I got to work, the phones lit up. Every order was a sell order,” he said.

People weren’t selling just 5,000 shares of General Electric Company GE or 2,000 shares of Citigroup Inc C, Polcari explained.

Instead, the sell orders were for 150,000 shares of General Electric or 300,000 shares of International Business Machines Corp. IBM. The orders were “massive, institutional orders,” Polcari said, but those were the orders that everyone had.

“There was, at that moment, a lack of buy side. And part of that was a direct result of, I would say, I would characterize it as kind of the first indication of where technology was going to take us,” he said.

The Quants

By 1987, asset managers worldwide had started using a product design called portfolio insurance, Polcari explained. It was a risk-management program designed by a computer system.

“It was the beginning of the quant people,” Polcari said. “They responded to what the computer told them to do.”

On that particular Monday, the portfolio insurance product had taken in all the data from the previous week, including technical levels that had been broken and macro data indications for all over the world, and given a very specific order to all the asset managers who had it: sell.

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“This product was designed, as insurance is, to protect the portfolio. So after Friday night’s action, it sent out this message that everyone had to sell 2 percent of their portfolio in order to raise cash to protect the portfolio,” Polcari explained.

The initial sell orders started a chain reaction. The more that people sold, the more technical levels that were broken, which caused the risk management systems to tell people to sell even more.

“It was this dramatic meltdown. Think about this: Johnson & Johnson closed on Friday at $96. On Monday, it closed at $45. It lost 50 percent of its value in six hours of trading,” Polcari said.

Polcari also talked about imbalances in premarket trading and market structure.

Check out his full interview here:

Don’t forget to tune in to Benzinga’s #PreMarket Prep broadcast Monday-Friday 8-9:45 a.m. ET for all of the premarket info, news and data needed to start the trading day.

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