The Black Monday crash, one of the worst in U.S. history, had an enormous impact on American and world business. Following numerous studies of the crash, reforms were implemented to forestall such an event happening again.
On October 19, 1987, Black Monday,
The rest of the world was not as fortunate as the United States. By the end of October, Hong Kong, Australia, Spain, the United Kingdom, Canada, and New Zealand all experienced significant losses on their stock exchanges, and their economies underwent serious economic dislocations.
Shortly after Black Monday, President Ronald Reagan ordered a study to be conducted on what caused the crash. The resulting exhaustive study of U.S. stock exchanges, the Brady report, offered potential explanations for the disaster. However, the Brady report was not the only study written. Literally scores of individuals, think-tank groups, business agencies, and government agencies such as the Securities and Exchange Commission (SEC) analyzed the crash. Given the nature of the problem and the number of different studies, it is not surprising that no one single cause or report was accepted by all involved.
New York Stock Exchange traders join in the panic selling on Black Monday.
Among the more widely accepted explanations of Black Monday advanced by scholars are the following. Program or computer trading, allowing computers to be involved in trades once certain guidelines were met, may have exacerbated the crash by causing mass sell-offs more quickly than humans could react. The market may have been widely overvalued, meaning that stocks were valued much higher than their worth. Portfolios may have been underinsured or uninsured. There may have been insufficient coordination within the exchanges.
Other widely accepted scholarly theories of causes contributing to the crash include illiquidity, or the problem of individuals and corporations being unable to convert their holdings to cash; failure of technology (too much stock activity occurred on Black Monday, and the technology controlling trading could not handle it all); investments in derivative securities (options and futures); U.S. trade and budget deficits; market psychology or overconfidence; and international disputes among the world’s industrialized countries over monetary policy. In many ways, what all these explanations boil down to is that the U.S. stock exchanges had serious internal problems that were not addressed until it was too late. The end result was almost a complete collapse of the market structure. Fortunately, the U.S. market rebounded fairly quickly and recovered. More important, studies of Black Monday led to significant reforms of the stock exchanges.
The reforms implemented after Black Monday were designed to sustain the stock market’s structure during a crisis. Circuit breakers or trading halts were instituted to forestall a complete collapse of the stock exchange: If the market’s value were to fall by a certain number of points, trading would be automatically suspended for a specified period of time to allow brokers and investors to calm down. Other improvements included improved coordination among federal agencies and among the various markets, more authority being given to the SEC to act on an emergency basis, and restrictions being placed on computer trading. Over-the-counter (OTC) market specialists and market makers were held more accountable and were required to publicize their quotes more openly, clearance and settlement systems were improved, and cross-margining programs were implemented. These reforms collectively reduced but did not eliminate the possibility of another severe stock market crash.
Arbel, A., and Albert Kaff. Crash: Ten Days in October . . . Will It Happen Again? Chicago: Longman Financial Services, 1989. Analysis of the factors contributing to Black Monday and the likelihood of similar factors causing a similar event in the future. Bernstein, Peter. Capital Ideas: The Improbable Origins of Modern Wall Street. New York: Free Press, 1992. Historical study of the evolution of the U.S. stock markets, from their beginnings through the late twentieth century. Kamphuis, Robert W., et al., eds. Black Monday and the Future of Financial Markets. Chicago: Mid-America Institute for Public Policy Research, 1989. Public policy-focused study of the lessons to be learned from Black Monday. Lindsey, Richard, and Anthony Pecora. “Ten Years After: Regulatory Developments in the Securities Market Since the 1987 Market Break.” Journal of Financial Services Research 13, no. 3 (1998): 283-314. Overview of the reforms instituted during the decade following the 1987 stock market crash. Malliaris, A. G., and Jorge Urrutia. “The International Crash of October, 1987: Causality Tests.” Journal of Financial and Quantitative Analysis 27, no. 3 (1992): 353-364. Another causal analysis of the crash, but focused globally rather than just on the American experience. Schwert, G. William. “Stock Volatility and the Crash of ’87.” Review of Financial Studies 3, no. 1 (1990): 77-102. Looks at the role of volatility as a causal trigger in the stock market crash of 1987.
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