Thursday, February 18, 2021

The 1987 Stock Market Crash: Electronic Trading Is Born

Before 1987, the only way you could trade stocks was by calling your stockbroker on the phone (unless you were one of the lucky few who had enough money to buy a seat on one of the stock exchanges).

The weakness of this system was revealed in October 1987, when the U.S. markets crashed, falling by more than 20 percent in one day. Because many investors and institutional investors panicked and tried to sell at the same time, the phone lines jammed or stockbrokers refused to answer their phones. 

On more than a few occasions, the floor brokers filled the orders of institutional investors but ignored orders from individual investors. (As you can imagine, many investors lost everything because they sold too late.) 

Because of this fiasco, the Nasdaq created a special computerized system called SOES (Small Order Execution System) that allowed traders to place orders electronically and at the most competitive price. The first to take advantage of SOES were day traders, who discovered that they could bypass a stockbroker and send their orders directly to the stock exchange. 

This was the beginning of the online trading revolution, but it was only for day traders. It was another 10 years before retail investors were allowed to trade online.

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