What was “Black Monday”?
– The phrase most often describes the market collapse on October 19, 1987, a single trading day when U.S. equity indexes plunged. The Dow Jones Industrial Average fell about 22.6% that day; broad indexes such as the S&P 500 recorded even larger one‑day losses (roughly 30%). The label “Black Monday” is also used historically for other sharp Monday drops, notably October 28, 1929 (about a 12.8% decline), which preceded the Great Depression.
Key definitions (jargon explained)
– Program trading: automated, rule‑based trading where computers submit large baskets of orders based on pre-set criteria.
– High‑frequency trading (HFT): a subset of automated trading that executes very large numbers of orders in fractions of a second using powerful computers and co‑located servers.
– Circuit breaker: an exchange mechanism that pauses trading when an index or individual stock moves beyond predefined thresholds, intended to stop panic selling and give participants time to reassess.
– Flash crash: a very fast, severe market drop (and often a rapid rebound) that happens in minutes or seconds, frequently linked to automated trading interactions.
What caused the 1987 crash (summary)
– No single weekend headline or single news item explains the 1987 event. Instead, several elements converged to amplify selling pressure:
– A growing use of computerized program trading and portfolio‑insurance strategies that mechanically sold stocks as prices fell.
– Elevated volatility and international market linkages that spread panic globally.
– A liquidity squeeze when sellers overwhelmed buyers, making price moves larger than usual.
– Authorities responded quickly to restore liquidity: the U.S. central bank lowered short‑term interest rates and provided sizable liquidity to markets.
Market safeguards introduced after 1987
– Exchanges and regulators added multiple protections aimed at reducing the chance that automated selling cascades wipe out prices in minutes:
– Market‑wide circuit breakers tied to percent drops in the major index. Current U.S. thresholds (for the S&P 500) are roughly 7%, 13% and 20% measured from the prior close. The first two trigger a 15‑minute market pause if they occur before a late cutoff; the final level typically halts trading for the day.
– Individual stock trading halts when a security moves too far, too fast during the session.
– Those measures reduced some types of crash risk but did not eliminate fast, algorithm‑driven volatility (see the 2010 Flash Crash).
Other notable “Black Mondays”