Live After Quit

Revisiting 1987: How the Stock Market and Fishhooks Changed the Decade

The 1987 stock market crash is an event engraved in financial history as one of the most highly volatile moments of American investment. After the market’s record-setting surge that year, the Dow Jones Industrial Average (DJIA) dropped 22.6% on a single day, bringing the American economy to its knees and investors into frenzied panic. On October 19th, 1987, over 500 billion dollars were lost in the chaos as twice that day’s average volume of stock was exchanged. The primary contributing factor to the ‘Black Monday’ crash was the development of portfolio insurance. As stocks continued to rise higher, investment programs were designed to leverage portfolio losses by selling stocks as they dropped in price. Unfortunately, the sell-off process did not factor in the possibility of extreme market volatility. As a result, the morning of October 19th saw a flood of orders to sell stock, making the crash all the more catastrophic. To this day, Wall Street is divided on whether the crash was the product of a conscious sell-off or a highly complex sequence of events that caused the market to plummet. In addition, the unprecedented event has opened up the discussion about whether the presence of so called ‘high-frequency’ traders has helped avoid similar disasters since. These financial wizards have been said to be able to capitalize on quick market fluctuations with algorithmic trading programs and exploit liquid investments to realize profits. Despite the fact that the crash left many investors shaken and weeks later slightly more people were still pessimistic than optimistic, the resilient American economy had more than recovered the losses by the end of December. Then, in the wake of the crash, the ‘circuit breaker’ was put into effect, forcing a complete stop of trading if the Dow dropped 10% in a single session. Work by economists such as Fischer Black and Myron Scholes, as well as the creation of the Black-Scholes options pricing formula, also made their contribution to the legacy of the 1987 stock market crash. Traders have applied the model as a means of demonstrating the value of options contracts for volatility purposes, arguably helping to provide a safe-guard against drastic downward trends. Three decades on, investors and brokers are able to reflect on the incredible events of 1987 and all the developments that have come since. Financial authorities now have stricter regulations in place and algorithmic trading programs offer a fully fledged way for investors to leverage market data. All of this is in a bid to protect the integrity of the investing environment. Ultimately, while the stock market crash of 1987 will remain one of the most volatile events in American financial history, the developments that have followed have helped ensure the robustness of the stock market for future generations.