Report of the Presidential Task Force on Market Mechanisms

On October 19, 1987, the Dow Jones dropped 508 points—22.6% of its value—in a single day. Over $500 billion vanished before the closing bell. President Reagan's task force, led by future Treasury Secretary Nicholas Brady, diagnosed what went wrong: $60-90 billion in 'portfolio insurance' had created a feedback loop that turned a correction into a catastrophe.

Portfolio insurance worked like this: algorithms automatically sold futures when prices fell, supposedly limiting downside risk. The problem? When everyone's algorithm triggers simultaneously, selling pressure cascades. Safety mechanisms designed for individual protection became systemic threats when adopted en masse—the financial equivalent of everyone running for the same exit. The Brady Commission estimated three portfolio insurers alone dumped $2 billion on the NYSE that Monday, while futures markets absorbed $4 billion equivalent—over 40% of futures volume. By the time models 'required' an additional $12 billion in sales, there were no buyers left.

The report's lasting contribution: circuit breakers. These mandatory trading halts (now triggered at 7%, 13%, and 20% S&P 500 declines) don't prevent crashes—they interrupt the positive feedback loop that turns orderly selling into panic. As Brady and Glauber wrote: 'Circuit breakers can't produce miracles... They can just provide a breather, a chance to interrupt panic.'

Biologically, circuit breakers function like fever: the body forces a slowdown (sleep, reduced appetite) that prevents a runaway immune response from destroying the host. The report recognized that markets, like organisms, need mechanisms to prevent stress responses from becoming lethal—a principle central to understanding why financial systems require built-in speed limits.