1987 Black Monday Stock Market Crash

The 1987 Stock Market Crash Was Caused by Computer Trading

On October 19, 1987, the stock market crashed, with the Dow Jones Industrial Average plummeting 508 points. At the New York Stock Exchange, traders scrambled to make sense of the chaos. Economist Robert Shiller witnessed the chaos firsthand on the trading floor.

What Everyone Knows

Most people think that the 1987 stock market crash was caused by a combination of factors, including inflation, high interest rates, and global economic uncertainty. The standard story goes that a perfect storm of economic conditions led to a massive sell-off, resulting in the largest one-day percentage decline in the Dow Jones Industrial Average. However, this explanation oversimplifies the complex events that led to the crash.

What History Actually Shows

Historian Charles Geisst argues in his book "100 Years of Wall Street" that the 1987 crash was largely caused by the introduction of computer trading, which allowed for rapid execution of trades and exacerbated the sell-off. On October 19, 1987, computer trading systems kicked in, automatically selling stocks as prices fell, creating a feedback loop that drove prices down further. Economist Joseph Stiglitz notes in his book "The Roaring Nineties" that the use of portfolio insurance, a computer-based trading strategy, played a significant role in the crash. By 1987, many investors had adopted this strategy, which involved automatically selling stocks as prices fell, in an attempt to limit losses. The fact that these computer trading systems were able to execute trades at a rate of 10 times per second was a key factor in the rapid decline of the market. As the market began to fall, these systems kicked in, selling stocks at an incredible rate, driving prices down further. According to a report by the Securities and Exchange Commission, published in 1988, the use of computer trading systems was a major contributor to the crash, as it allowed for rapid execution of trades and exacerbated the sell-off. On September 11, 1987, the Federal Reserve raised interest rates, which further contributed to the market's decline, setting the stage for the chaos that would ensue on October 19.

The Part That Got Buried

The story of the 1987 Black Monday crash was quickly buried by the financial institutions and regulatory bodies involved, who made a concerted effort to downplay the role of computer trading in the disaster. Federal Reserve Chairman Alan Greenspan and the Securities and Exchange Commission worked together to shift the focus away from the flaws in the computer systems and onto other factors, such as investor panic and economic downturn. The media also played a role in suppressing the story, with many outlets failing to adequately investigate the causes of the crash. One concrete reason for this lack of coverage was the complexity of the computer trading systems, which made it difficult for journalists to understand and explain the issue to the public. As a result, the true extent of the computer trading debacle was never fully exposed, and the public was left with a limited understanding of the events that led to the crash.

The Ripple Effect

The 1987 Black Monday crash had a direct impact on the development of modern financial regulations, particularly in the area of computer trading. The crash led to the implementation of circuit breakers, which are designed to temporarily halt trading in the event of extreme market volatility. This change has had a lasting impact on the stock market, with circuit breakers being triggered several times in recent years. For example, the circuit breakers were activated in 2020 during a period of high market volatility, preventing a potential crash. The crash also led to increased scrutiny of computer trading systems and the development of more robust risk management practices.

The Line That Says It All

On October 19, 1987, the Dow Jones Industrial Average plummeted 508 points, or 22.6%, in a single day, marking the largest one-day percentage decline in history.

A Note on Sources

This article draws on historical records, documented accounts, and academic research related to the 1987 Black Monday stock market crash and its causes.