The coming US dollar crisis Message Board

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Strategies & Market Trends : The coming US dollar crisis

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To: carranza2 who wrote (12693)	10/8/2008 8:00:52 PM
From: Real Man	1 Recommendation Read Replies (1) of 71454

Black-Scholes flat vanilla puts... without volatility "smile". Financial engineering was just beginning. We blew through that smile. en.wikipedia.org The most popular explanation for the 1987 crash was selling by program traders.[9] U.S. Congressman Edward J. Markey, who had been warning about the possibility of a crash, stated that "Program trading was the principal cause."[10] In program trading, computers perform rapid stock executions based on external inputs, such as the price of related securities. Common strategies implemented by program trading involve an attempt to engage in arbitrage and portfolio insurance strategies. The trader Paul Tudor Jones predicted and profited from the crash, attributing it to portfolio insurance derivatives which were "an accident waiting to happen" and that the "crash was something that was imminently forecastable". Once the market started going down, the writers of the derivatives were "forced to sell on every down-tick" so the "selling would actually cascade instead of dry up."[11] As computer technology became more available, the use of program trading grew dramatically within Wall Street firms. After the crash, many blamed program trading strategies for blindly selling stocks as markets fell, exacerbating the decline. Some economists theorized the speculative boom leading up to October was caused by program trading, while others argued that the crash was a return to normalcy. Either way, program trading ended up taking the majority of the blame in the public eye for the 1987 stock market crash.

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