1962 Flash Crash
Computerized trading only accelerates the irrationality which pervades stock markets. On the last 28 May 1962, the American stock markets suffered a “flash crash.”
The stock market careened downward yesterday, leaving traders shaken and exhausted. ~ The Wall Street Journal on 29 May 1962
The 1962 “market break” came after a run-up that had lulled many investors into complacency. In 1961, stocks rose 27%, with leading technology stocks trading at up to 115 times earnings. (Historically, price/earnings (P/E) ratios have averaged between 10 and 20, with a wide range between bull and bear markets. At the height of the dot-com bubble, the median P/E was 32.)
For the economy as a whole, the year and a half preceding the market break was a period of hesitation. Doubts concerning the economy were certainly not reflected in the exuberant stock markets of 1961. There was an atmosphere of feverish speculation. ~ SEC report on the 1962 stock “market break” (The SEC is the US Securities and Exchange Commission, which is the federal agency responsible for stock market regulation.)
While high-frequency trading did not exist in 1962, “specialists” did. By law, specialists were obligated to try to maintain a fair and orderly market. No such thing happened: specialists did their best to make hay, not calm.
Some orders were executed at prices substantially different from those which prevailed when the order was entered. ~ SEC report
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The markets’ erratic behavior prompted concern and caused bewilderment at home and abroad. This break had a strong and immediate psychological impact upon the Nation. ~ SEC report
The stock market continued to be volatile throughout the month of June 1962, and only began to steadily climb again after the Cuban Missile Crisis ended in October.
Despite public pressure to clean up trading procedures, nothing changed in the wake of the 1962 market break. By the summer of 1968, billions of dollars of trade were going astray every month.