October 19th, 1987Submitted by Mission Financial Planning on October 19th, 2012
The worst one-day crash in stock trading took place 25 years ago today.
At the time, Tonyia was working as a bond trader and Sharon was a stockbroker. Much was learned by living through the crash and the markets that preceded and followed.
What triggered this stock market crash?
The largest-ever percentage loss of 22.6% on Oct. 19, 1987, earned it the dark title “Black Monday.”
Stock markets around the world came crashing down, beginning in Hong Kong, spreading its tendrils west to Europe, and finally finding U.S. markets. (Note that Australia and New Zealand call this day “Black Tuesday” because of the time zone difference.)
There are a few theories regarding the cause of Black Monday, but the most popular is program trading.
“Program trading” is a type of securities trading in which groups of 15 stocks or more are traded simultaneously based on preexisting factors via computer program. Investors use this method when they wish to trade a large number of stocks at the same time, or to take advantage of a window of price discrepancies between markets (arbitrage).
Computer Trading On Wall Street
In the late 1980s, computer technology became more common, leading to a burst of program trading use on Wall Street. The public largely blamed program trading for blindly selling stocks as the market dropped, exacerbating the crash. Whether that was actually the case, or the sheer novelty of mass program trading caused a general distrust of it, is debatable. Some other theories on what caused Black Monday areovervaluation, illiquidity, and market psychology.
The second-largest daily percentage loss on the Dow is another “Black Monday,” and it’s followed by the third-largest drop on “Black Tuesday,” on Oct. 28-29, 1929.