A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market

by Edward O. Thorp

At the time of the crash $60 billion or so of equities were insured by this technique and implemented largely by computers. When the market fell 4 percent on Friday the insurance programs placed orders, to be executed at Monday’s opening, to sell stock and buy Treasury bills. When trading began on Monday, these sales drove stock prices down further, triggering more selling from portfolio insurance programs. As prices continued to plummet, investors panicked and added their selling to the deluge. This “feedback loop” continued throughout the day, building to a devastating climax. Portfolio insurance was designed to protect investors from large market declines. Ironically, the cure became the cause.