1987 Black Monday stock market crash

1987 Black Monday stock market crash
Title	1987 Black Monday stock market crash
Caption	Trading floor during the 1980s; brokers and traders at the New York Stock Exchange
Date	October 19, 1987
Location	New York City, Toronto, London, Tokyo, Sydney
Type	Stock market crash
Outcome	Global equity declines, regulatory reforms, changes in Federal Reserve System policy

1987 Black Monday stock market crash The 1987 crash was a global equity market collapse that culminated on October 19, 1987, when major indices plunged in a single day. The event affected financial centers including New York City, London, Tokyo, Toronto, and Sydney and involved actors such as institutional investors, brokerage firms like Salomon Brothers, and central banks including the Federal Reserve System and the Bank of England.

Background and causes

In the years before 1987, equity markets experienced prolonged rallies involving participants including pension funds associated with United States Department of Labor regulations, institutional managers tied to CalPERS, and brokerage houses like Merrill Lynch and Goldman Sachs. Deregulation trends linked to policies of the Reagan administration and Margaret Thatcher era reforms interacted with innovations in trading such as program trading used by firms like Barclays and Shearson Lehman Brothers. Financial instruments such as futures contracts traded on exchanges like the Chicago Mercantile Exchange and Chicago Board of Trade and options listed on the Chicago Board Options Exchange facilitated portfolio insurance strategies developed by academics linked to University of Chicago research and financial engineers influenced by work at Massachusetts Institute of Technology.

The crash on October 19, 1987

On October 19, indices like the Dow Jones Industrial Average suffered unprecedented intraday declines as automated trading systems and sell programs at institutions including Kidder, Peabody & Co. and First Boston executed large orders. The New York Stock Exchange faced extreme volume while regional exchanges such as the Toronto Stock Exchange and Australian Securities Exchange recorded sharp falls. Market makers and specialists from houses like Salomon Brothers and Lehman Brothers navigated record volatility, prompting communications with central banks such as the Federal Reserve System and the Bank of Japan.

Global impact and market reactions

Markets worldwide, including London Stock Exchange, Frankfurt Stock Exchange, Hong Kong Stock Exchange, and Tokyo Stock Exchange, registered dramatic declines, generating policy responses from institutions such as the Bank of England, the European Central Bank (later developments referenced), and national ministries including the United States Department of the Treasury and HM Treasury. Contagion effects impacted commodity markets traded on the New York Mercantile Exchange and currency markets involving pairs like the United States dollar versus the Japanese yen, drawing commentary from economists associated with Harvard University and Princeton University.

Causes and contributing factors

Analyses emphasized factors like portfolio insurance methods linked to research from scholars at University of California, Berkeley and Carnegie Mellon University, program trading executed by firms such as UBS and Credit Suisse, and liquidity stresses at broker-dealers including Salomon Brothers. Macroeconomic influences included interest-rate dynamics monitored by the Federal Reserve System and inflation indicators tracked by agencies like the Bureau of Labor Statistics. International capital flows among markets including Singapore Exchange and Toronto Stock Exchange and regulatory frameworks overseen by agencies like the Securities and Exchange Commission and the Financial Services Authority shaped market depth. Media coverage from outlets including The New York Times, The Wall Street Journal, and BBC News amplified investor reactions.

Economic and regulatory aftermath

In response, central banks coordinated operations, with the Federal Reserve System providing liquidity through institutions such as the Federal Reserve Bank of New York and communicating via officials like Alan Greenspan, who became Chair of the Federal Reserve in 1987. Regulatory reviews by the Securities and Exchange Commission and policy debates in bodies such as the United States Congress led to infrastructure changes including the implementation of trading curbs later formalized by exchanges like the New York Stock Exchange and reforms in clearinghouses such as the Depository Trust Company. Broker-dealer capitalization standards were revisited by entities including the Basel Committee on Banking Supervision and influenced risk-management practices at firms like Goldman Sachs and Morgan Stanley.

Historical significance and legacy

The crash reshaped thinking at academic institutions including London School of Economics and Columbia Business School about market microstructure, volatility, and systemic risk, influencing subsequent episodes like the 2008 financial crisis and policy frameworks involving central banks such as the Federal Reserve System and the European Central Bank. Structural changes to exchanges including the New York Stock Exchange and the advent of electronic markets like NASDAQ altered trading ecology. The episode remains a reference point in literature from researchers at National Bureau of Economic Research and commentators in publications such as The Economist.

Category:Stock market crashes Category:1987 in economics Category:20th-century economic history