A:

Monday October 19,1987, is known as Black Monday. On that day, stockbrokers in New York, London, Hong Kong, Berlin, Tokyo and just about any other city with an exchange stared at the figures running across their displays with a growing sense of dread. A financial strut had buckled and the strain brought world markets tumbling down.

In the United States, sell orders piled upon sell orders as the Dow shed value of nearly 22%. There had been talk of the U.S. entering a bear cycle, but the markets gave very little warning to the then-new Federal Reserve Chairman Alan Greenspan. Greenspan hurried to slash interest rates and called upon banks to flood the system with liquidity. He had expected a drop in the value of the dollar due to an international tiff with the other G7 nations over the dollar's value, but the seemingly worldwide financial meltdown came as an unpleasant surprise that Monday.

Exchanges also were busy trying to lock out program trading orders. The idea of using computer systems to engage in large scale trading strategies was still relatively new to Wall Street and the consequences of a system capable of placing thousands of orders during a crash never had been tested. To the dismay of the exchanges, program trading led to a domino effect as the falling markets triggered more stop-loss orders. The frantic selling activated yet another round of stop-loss orders, which dragged markets into a downward spiral.

Program traders took much of the blame for the crash, which halted the next day, thanks to exchange lockouts and some slick, possibly shadowy, moves by the Fed. Just as mysteriously, the market climbed back up towards the highs it had just plunged from. Many investors who had taken comfort in the ascendancy of the market and had moved towards mechanical trading were shaken up badly by the crash.

Although program trading contributed greatly to the severity of the crash, the catalyst is still unknown, and possibly unknowable. With complex interactions between international currencies and markets, hiccups are likely to arise. After the crash, exchanges implemented circuit breaker rules and other precautions to slow down the impact of irregularities in hopes that markets will have more time to correct similar problems in the future.

To learn more about market crashes, see The Greatest Market Crashes.

This question was answered by Andrew Beattie.

RELATED FAQS
  1. What is the difference between a stop loss order and a limit order?

    Learn how to manage losses and reduce risk in volatile markets while reviewing the differences between stop-loss orders and ... Read Answer >>
  2. How did the stock market operate prior to the Securities and Exchange Commission?

    Read about the early stock exchanges in the United States, how corporations issued their shares through brokers and why railroads ... Read Answer >>
  3. Is there a difference between the special administrative regions of Hong Kong and ...

    As Special Administrative Regions (SARs) of the People's Republic of China, Hong Kong and Macau differ somewhat in their ... Read Answer >>
  4. What types of investors are best-suited for stop loss orders?

    Use a stop-loss order to mitigate downside risk. Whether you are a conservative beginner or a seasoned day trader, a stop ... Read Answer >>
  5. What is Black Friday?

    Black Friday is a popular label attached to the Friday following Thanksgiving Day in the US. This day marks the beginning ... Read Answer >>
  6. What are the historical beginnings of the securities industry?

    Learn the history of securities trading, beginning in 12th century France and leading to world financial market centers in ... Read Answer >>
Related Articles
  1. Personal Finance

    The Crash Of 1929 - Could It Happen Again?

    Learn about the series of events that triggered the Great Depression.
  2. Forex Education

    October: The Month Of Market Crashes?

    In the finance world, October is a month to be feared, but is it justified?
  3. Personal Finance

    Examining Credit Crunches Around The World

    Market tops and bottoms have proliferated the financial markets throughout history. Learn how countries dealt with these tough economic periods.
  4. Trading Strategies

    What Caused The Flash Crash?

    Investigators are still trying to figure out what went wrong on May 6, but it seems likely that the crash was caused by multiple interlocking failures.
  5. Trading Strategies

    The Perils Of Program Trading

    The increasing use of program trading makes market glitches inevitable - and sometimes disastrous.
  6. Mutual Funds & ETFs

    Did ETFs Cause The Flash Crash?

    On May 6, 2010, the DJIA plunged 998.5 points in twenty minutes. Find out more about what happened that day.
  7. Active Trading

    Connecting Crashes, Corrections And Capitulation

    Even though crashes, corrections and capitulations are bad news for investors holding the stock, there are still ways to profit.
  8. Personal Finance

    How The Federal Reserve Was Formed

    Find out how this institution has stabilized the U.S. economy during economic downturn.
  9. Forex Education

    The Hong Kong Dollar: What Every Forex Trader Needs To Know

    Find out everything you need to know about the eighth most traded currency in forex.
  10. Economics

    The World's Top Financial Cities

    These cities are the heart of the world's financial activity.
RELATED TERMS
  1. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) ...
  2. Stock Market Crash Of 1987

    A rapid and severe downturn in stock prices that occurred in ...
  3. Stock Market Crash Of 1929

    A severe downturn in equity prices that occurred in October of ...
  4. Circuit Breaker

    Circuit breakers are measures approved by the SEC to curb panic-selling ...
  5. Equity Market

    The market in which shares are issued and traded, either through ...
  6. Black Thursday

    The name given to Thursday, Oct. 24, 1929, when the Dow Jones ...
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center