1987 stock market crash

1987 stock market crash
Title	Stock market crash of October 1987
Date	October 19, 1987
Location	New York City, global
Also known as	Black Monday
Indices affected	Dow Jones Industrial Average, S&P 500, NASDAQ Composite, FTSE 100, Nikkei 225
Market cap loss	Significant; one-day declines up to 22.6% on Dow Jones Industrial Average

1987 stock market crash

The 1987 stock market crash was a sudden and severe global equity market decline that reached its apex on October 19, 1987, known as Black Monday. Major indices including the Dow Jones Industrial Average, S&P 500, and FTSE 100 experienced record intraday and closing losses, prompting scrutiny of trading mechanisms, financial institutions, and regulatory frameworks such as the Securities and Exchange Commission's rules. The shock reverberated through capitals from Washington, D.C. to Tokyo and influenced subsequent policy debates involving figures like Alan Greenspan and institutions such as the Federal Reserve System.

Background

In the mid-1980s markets worldwide, indices such as the Dow Jones Industrial Average, S&P 500, NASDAQ Composite, FTSE 100, and Nikkei 225 had posted strong gains following events like the Reagan tax cuts era and the deregulation trends associated with Thatcherism in the United Kingdom. Rising valuations and innovations in financial instruments, including derivatives traded over-the-counter and on exchanges like the Chicago Board Options Exchange, intersected with portfolio insurance strategies pioneered in academic work linked to scholars at institutions like University of Chicago and Massachusetts Institute of Technology. Political developments including tensions between United States and Iran-Contra affair-era geopolitics, plus currency moves after decisions by the European Economic Community and central banks such as the Bank of Japan, set a complex backdrop.

Events of Black Monday (October 19, 1987)

On October 19, trading opened amid selling pressure that accelerated through interactions among brokers on New York Stock Exchange floors, program trading systems at houses like Goldman Sachs, and electronic execution platforms used by firms associated with Salomon Brothers. The Dow Jones Industrial Average fell 508 points (22.6%), while the S&P 500 and NASDAQ Composite suffered comparable declines, producing cascading margin calls at broker-dealers including Lehman Brothers affiliates. Exchanges in London (London Stock Exchange) and Hong Kong (Hong Kong Stock Exchange) recorded severe drops, and policy makers from the Federal Reserve System to the Bank of England monitored liquidity stresses. Market makers and clearing operations coordinated emergency measures with regulators such as the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Causes and contributing factors

Analyses attributed the crash to a confluence of factors: mechanical effects of program trading strategies like portfolio insurance developed by firms influenced by research from University of Pennsylvania and practitioners at Morgan Stanley, price-valuation metrics in indices such as the S&P 500, and illiquidity exacerbated by market structure issues on exchanges like the New York Stock Exchange. International linkages via currency pressures following actions by the Bank of Japan and policy moves in the European Economic Community amplified transmission across markets including the Frankfurt Stock Exchange and Bourse de Paris. Institutional behaviors at houses including Merrill Lynch and Citigroup, combined with regulatory frameworks overseen by the Securities and Exchange Commission and Commodity Futures Trading Commission, intensified feedback loops. Commentators referenced academic models from Black–Scholes option pricing literature and portfolio theory from Harry Markowitz as context for widespread use of derivatives and hedging.

Immediate market and economic impact

In the days after October 19, broker-dealers and clearing firms such as Depository Trust & Clearing Corporation processed extraordinary volumes, and exchanges implemented temporary measures to restore orderly markets. Despite the magnitude of equity losses, major economies overseen by central banks including the Federal Reserve System, Bank of England, and Bank of Japan avoided a simultaneous banking crisis. Corporate financing activities involving firms like General Electric and IBM slowed, and consumer confidence indicators used by agencies in Washington, D.C. registered declines. While GDP contractions were limited compared with previous crises such as the Great Depression, the shock prompted reassessments of risk management at institutions including American Express and investment banks like Salomon Brothers.

Policy responses and regulatory changes

In response, regulators and central banks coordinated actions: the Federal Reserve System provided liquidity assurances consistent with directives influenced by Chairman Alan Greenspan, and the Securities and Exchange Commission and New York Stock Exchange developed structural changes such as circuit breakers and limits on program trading. Clearing and settlement improvements involved entities like the Depository Trust & Clearing Corporation, and policy debates in bodies like the United States Congress and international forums including the Group of Seven discussed cross-border coordination. Reforms addressed automated trading, disclosure by firms such as Goldman Sachs and Morgan Stanley, and margin practices at broker-dealers to reduce systemic vulnerabilities.

Global repercussions and comparisons to other crashes

The 1987 crash remains a reference point alongside events such as the 1929 Wall Street Crash, the 2000 dot-com bubble burst, and the 2008 financial crisis. Unlike the Great Depression-era collapse, recovery in major indices occurred relatively swiftly over months rather than years, contrasting with protracted downturns following the 2007–2008 financial crisis. International comparisons highlighted differences in market structure between exchanges like the Tokyo Stock Exchange and London Stock Exchange and influenced later regulatory frameworks under institutions such as the International Monetary Fund and the Bank for International Settlements. The episode shaped academic research at universities including Harvard University and Stanford University into market microstructure, program trading, and systemic risk.

Category:Stock market crashes