Wall Street Crash of 1987

Wall Street Crash of 1987
Name	Wall Street Crash of 1987
Caption	Traders on the New York Stock Exchange trading floor on Black Monday, October 19, 1987
Date	October 19, 1987
Location	New York City, United States
Causes	Program trading, portfolio insurance, market psychology, interest rate volatility
Outcome	Market reforms, central bank interventions

Wall Street Crash of 1987 The stock market collapse of October 19, 1987—commonly known as Black Monday—was a global financial shock that produced rapid declines across major equity markets. The episode involved the New York Stock Exchange, London Stock Exchange, and other principal venues such as the Tokyo Stock Exchange, with widespread attention from actors including the Federal Reserve System, Securities and Exchange Commission, and leading financial firms like Goldman Sachs and Merrill Lynch. The event accelerated debates among policymakers associated with institutions such as the International Monetary Fund and the Bank for International Settlements over market structure and systemic risk.

Background and causes

In the months preceding October 1987, equity valuations rose in markets including the S&P 500, FTSE 100, and Nikkei 225 amid trends tied to corporate activity by firms such as Drexel Burnham Lambert and policy shifts linked to figures like Paul Volcker and Alan Greenspan. Rising yields on Treasury instruments and volatility in the German mark and Japanese yen created cross-market stresses that concerned authorities at the Federal Reserve Bank of New York and the Bank of England. Market structure innovations—championed or implemented by institutions such as Salomon Brothers and Shearson Lehman Brothers—introduced mechanisms like portfolio insurance and program trading that interacted with investor behavior observed among entities like Pension Benefit Guaranty Corporation and CalPERS. Analysts pointed to international linkages involving the European Exchange System and policy coordination challenges referenced in meetings of the Group of Seven.

Timeline of events (October 1987)

Early October 1987 saw volatility spikes in indices such as the Dow Jones Industrial Average and the CAC 40 after interventions and statements from central bankers including Gavyn Davies-era commentators and officials at the Bank of Canada. By October 14, trading flows via institutions like Fidelity Investments and T. Rowe Price rose, setting the stage for heavy selling. On October 19, automated orders routed through systems employed by Goldman Sachs counterparties and program trading desks at Morgan Stanley contributed to cascading executions across venues including the Toronto Stock Exchange and Australian Securities Exchange. The intraday collapse featured precipitous falls in shares of blue-chip companies such as IBM, General Electric, and ExxonMobil. In the immediate aftermath, authorities at the Securities and Exchange Commission and the Commodity Futures Trading Commission convened with leadership from the Federal Reserve and executive offices of firms like Citicorp.

Market mechanisms and contributing factors

Program trading strategies—implemented by brokerage houses like Salomon Brothers and quantitative teams at Barclays—executed large basket trades across exchanges including the Frankfurt Stock Exchange and Borsa Italiana. Portfolio insurance strategies, promoted by consultants and asset managers working with Allied Capital and BlackRock predecessors, used dynamic hedging that amplified selling when indices fell. Other structural issues involved order routing systems at institutions such as NASDAQ market makers and clearing operations of the Depository Trust Company. Market makers' inventory constraints and liquidity withdrawals by firms like Lehman Brothers and Barclays Capital deepened price moves, while derivative positions in instruments traded on venues like the Chicago Board Options Exchange influenced hedging demands. Media reporting by outlets including The Wall Street Journal and The New York Times heightened investor sentiment along with commentary from economists at the National Bureau of Economic Research.

Economic impact and aftermath

The crash erased substantial market capitalization across indices—affecting pension funds such as those managed by CalPERS and insurance portfolios at firms like AIG—and prompted reassessments of valuation models used by institutions including Salomon Brothers and Goldman Sachs. Despite severe equity losses, broader financial stress did not immediately trigger a credit crunch analogous to later events involving Lehman Brothers in 2008; nonetheless, commercial banks including JPMorgan Chase and Bank of America monitored counterparty exposures. Policymakers at the Federal Reserve System and international bodies like the International Monetary Fund judged macroeconomic fundamentals, with academic researchers from Harvard University, Massachusetts Institute of Technology, and London School of Economics studying the implications for asset pricing models pioneered by scholars associated with Black–Scholes and Eugene Fama. The recovery in equity markets over subsequent months illustrated resilience but left permanent changes in risk management at firms such as Morgan Stanley.

Policy responses and regulatory changes

In response, regulators including the Securities and Exchange Commission and the Commodity Futures Trading Commission reviewed market rules, leading to structural reforms like the adoption of circuit breakers across exchanges such as the New York Stock Exchange and NASDAQ. Central bank action by the Federal Reserve—notably interventions coordinated with the Bank of England and Bank of Japan—helped reassure counterparties and underwriters at banks like Citigroup and Barclays. Market infrastructure improvements followed, involving clearinghouses at the Options Clearing Corporation and enhancements to reporting by firms such as Bloomberg L.P. and Reuters. Legislative attention in United States Congress committees and inquiries by agencies including the General Accounting Office prompted changes in transparency and trade reporting for participants like Mutual of America and Vanguard Group.

Global effects and international markets

The October collapse propagated through major capitals: the London Stock Exchange experienced steep declines in the FT-SE 100 while the Tokyo Stock Exchange registered sharp drops in the Nikkei 225. Markets in Hong Kong, Sydney, Toronto, and Frankfurt faced correlated selling pressures, challenging cross-border settlement systems used by institutions like the Euroclear and Clearstream. Sovereign debt yields in countries such as United Kingdom and Japan reacted to shifting expectations, drawing interest from policymakers at the International Monetary Fund and academics connected to University of Chicago research networks. The episode influenced reforms in trading protocols at exchanges like the Amsterdam Stock Exchange and shaped international cooperation frameworks at summits attended by finance ministers from the Group of Seven.

Category:Stock market crashes