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.
The NY Fed, under Gerald Corrigan, spent Monday night on the phone ensuring the clearinghouses would not fail. The next morning, several major institutions publicly committed to buying. The market stabilized. It's possibly the best-executed invisible rescue in modern finance.
05 · Black Monday
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.
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