One Market? Stocks, Futures, and Options During October 1987




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    • Kleidon is from the Graduate School of Business, Stanford University and Whaley is from the Fuqua School of Business, Duke University. Helpful comments have been received from Robert Daigler, Bruce Grundy, Charlie Jacklin, Craig MacKinlay, Barbara Ostdiek and Tom Smith. Kleidon gratefully acknowledges the financial assistance of the Stanford Program in Finance, Batterymarch Financial Management and the Business School Trust Faculty Fellowship. Whaley gratefully acknowledges support by the Isle Maligne Fund and the Futures and Options Research Center at Duke University.


We provide new evidence regarding the degree of integration among markets for stocks, futures and options prior to and during the October 1987 market crash. Where previous analyses have resulted in recommendations for the implementation of circuit breakers, the coordination of margin requirements across markets, and changes in regulatory jurisdiction, our analysis indicates that delinkage between markets during the crash was primarily caused by an antiquated mechanism for processing stock market orders. The results suggest that market integration may be better served by efficient order execution than by further restricting markets.

To a large extent, the problems of mid-October can be traced to the failure of these market segments [stocks, stock index futures, and stock options] to act as one. (Report of the Presidential Task Force [Brady Report] (1988, Executive Summary, p. vi)).