Portfolio insurance trades could double NYSE volume on a 3 percent drop

Evidence

By June 1987, the portfolios “insured” by LOR and its licensees were sufficiently large that Leland was pointing out that “if the market goes down 3 percent, which, in those days, would have been a very large one-day move, we could double the volume [of trading] in the New York Stock Exchange” (Leland interview). (Although by then LOR’s portfolio insurance was implemented primarily with futures, index arbitrage would transmit selling pressure from the futures to the stock market.) With sales on that scale, would informationless selling really have no effect on prices? — Donald MacKenzie, An Engine, Not a Camera, 811

Categorization

• QUESTION: The final rhetorical question is the performativity thesis in miniature: the size of a strategy’s own trades forces the market-model boundary. Worth chasing how this scales quantitatively for the 1987 crash chapter.
• XREF: connects to: Rumors during the 1987 crash exaggerated portfolio insurance trade size three to fourfold — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 874; Portfolio insurance designed to limit losses can amplify market volatility. — Shapiro, Susan P., The Social Control of Impersonal Trust, 144; Portfolio insurance sells more stock as price falls, creating mechanical downward supply. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 867 (+2 more)

Broader Connections

• Portfolio insurance sells more stock as price falls, creating mechanical downward supply. #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 867
• Rumors during the 1987 crash exaggerated portfolio insurance trade size three to fourfold #contradicts (0.80) — Donald MacKenzie, An Engine, Not a Camera, 874
• Portfolio insurance designed to limit losses can amplify market volatility. #expands (0.80) — Shapiro, Susan P., The Social Control of Impersonal Trust, 144
• Widely adopted portfolio insurance would amplify market price movements #corroborates (0.75) — Donald MacKenzie, An Engine, Not a Camera, 809
• Portfolio insurance creators accepted increased volatility as unproblematic #qualifies (0.70) — Donald MacKenzie, An Engine, Not a Camera, 813