Era 05 · 1987

Black Monday

Peak to trough

−22.6% in one day

Pulse cycle

3.5s

On October 19, 1987, the Dow fell 22.6% in a single session. It remains the largest one-day percentage decline in the history of the US stock market. Unlike 1929, there was no obvious economic cause. The consensus explanation is a feedback loop between portfolio insurance and program trading — algorithms selling because prices fell, then prices falling because algorithms sold.

Events in this era

Oct 19, 1987

Portfolio insurance collides with reality

'Portfolio insurance' was a hedging strategy that required selling stock-index futures as prices fell. On Monday morning, prices fell hard. The algorithms sold. That forced more selling. By the close, the market had lost more than a fifth of its value, and no one had a clean explanation.

−22.6% in a day, no recession followed

Oct 20, 1988

Circuit breakers adopted

A year to the month after the crash, the SEC and NYSE jointly implemented market-wide trading halts: a 7% intraday fall triggers a 15-minute pause; a 20% fall closes markets for the day. The design has been modified several times since but the principle still governs US equities.

Structural fix adopted in a year — unusually fast

Oct 20, 1987

Fed liquidity pledge

On Tuesday morning, one day after the crash, Federal Reserve Chairman Alan Greenspan (three months into the job) released a single-sentence statement: 'The Federal Reserve, consistent with its responsibilities as the nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.' Markets stabilized within hours.

Crash contained without a recession

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