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Black Monday crash (1987)
Oct 19, 1987· Crisis or event
Fact, law or dataA rule, statute, definition or measured number.
On October 19, 1987, the Dow fell 22.6% in one day, still its largest one-day percentage drop.
See it on the Money & Finance map →How it works
After a strong 1987 run-up, worries about rising rates and the trade deficit hit a market newly wired for computer trading. 'Portfolio insurance' programs sold stock-index futures as prices fell, which pushed prices lower and set off more selling. The Dow lost 508 points; markets fell worldwide, and Hong Kong closed for four days. The next morning, new Fed chair Alan Greenspan pledged liquidity. No recession followed, and the Dow regained its pre-crash level in about two years.
Why it matters
It showed automated selling can feed on itself, led to circuit breakers, and set the precedent of the Fed stepping in to calm markets, later called the 'Greenspan put'.
Think of it like
Like a thin market full of stop-loss orders: each forced sale sets the next price lower and triggers the next sale, until buyers return.
Facts, rules and data
The Brady Commission report (January 1988), SEC and CFTC staff studies, NYSE trading records, and the Fed's one-sentence statement of October 20, 1987.
Debates and risks
No news event seems big enough to explain a 22% drop; how much portfolio insurance mattered versus plain panic is still debated.
Connections (2)
▸Black Monday crash (1987) led to circuit breakers on Stock exchanges: NYSE and NasdaqFact, law or data
The connection
Investigators found that stock, futures and options markets had fallen out of sync, with selling cascading between them. In 1988 exchanges adopted circuit breakers, coordinated pauses after big drops. Today a 7% fall in the S&P 500 halts trading for 15 minutes, again at 13%, and a 20% drop closes markets for the day.
When and why
Adopted in October 1988 after the Brady Commission report; first triggered October 27, 1997, and tripped four times in March 2020.
How we know
The Brady Commission's recommendations and the SEC-approved market-wide halt rules, last overhauled in 2012.
Debates and risks
Whether halts calm panic or worsen it, as traders rush to sell before a pause (the 'magnet effect'), is debated.
▸Black Monday crash (1987) was worsened by 'portfolio insurance' using Options and other derivativesMainstream view
The connection
'Portfolio insurance' sold S&P 500 index futures as stocks fell, to mimic a protective put option. On October 19, 1987, that selling drove futures below stock prices; arbitrageurs then sold stocks, which triggered more insurance selling, a feedback loop. The Dow fell 22.6% in one day, its worst ever.
When and why
Chicago's S&P 500 futures pit and the New York Stock Exchange, October 19, 1987; an estimated $60 billion to $90 billion was covered by such strategies.
How solid is the link?
The Brady Commission report (January 1988) blamed portfolio insurance and the futures-stock link; exchanges later added circuit breakers.
Debates and risks
How much portfolio insurance caused the crash versus speeding it up is debated; markets fell worldwide, including where it was little used.