The stock market crash of 1987, commonly referred to as “Black Monday,” is an event that has been remembered and referenced countless times since. Not only did it cause a tremendous amount of financial damage, it also had a significant impact on the way financial markets operate today.
The stock market had been in a critical state leading up to the crash, having been hit by the ongoing “program trading,” a strategy that allows investors to make large trades based on market signals. This was a form of speculative trading that made it easy for traders to make large amounts of money quickly by taking advantage of price movements in the fragmented markets.
As prices kept rising over time, more and more investors took on the risky strategy, leading to more and more trades and a gradually increasing sense of instability in the markets. It was during this period that the famous saying “When the going gets tough, the tough get going” was coined.
Things came to a head on October 19th, 1987, when the Dow Jones Industrial Average abruptly lost 22.6%, its largest single day percentage drop to this day. At first, the crash was thought to have been triggered by a wave of computer-programmed selling. In the days following, researchers came to the conclusion that this was most likely not the culprit of the crash and instead fingered some of the shadier players in financial markets.
Researchers have since referred to this event as the “Fishhooks Case”, which highlights the exploits of a group of financial traders involved in a massive stock-manipulation scheme that helped precipitate the huge drop in the markets. This group of “uncanny traders”, as they were called, employed a vector-based trading system to rapidly accumulate large groups of shares and then resell them at ahigher price when the opportunity presented itself.
The revelation of this group’s activities helped to reinvigorate regulations in financial markets, as investors demanded better protections against such unethical practices. Rules for stock market lending were also tightened, imposing more restrictions on who could borrow funds and how much could be borrowed.
These regulations, along with the introduction of the so-called “circuit breaker” system, have helped to protect against any single event from heavily impacting the markets to the degree they did in 1987. While the events of the “Black Monday” crash might seem distant, the lessons learned from it are still relevant today and serve as a reminder of the importance of responsible financial stewardship.
