20-two years ago today, the Dow Jones fell 22.6% in a single day.
Back then, this Black Monday followed a powerful two-year stock market rally whereby investors had become caught up in the euphoria of the time – such as buyouts, mergers, and computers.
Today, the trailing two years leading up to 19 October, 2009 have been far less positive in comparison.
Yet the popular disgust for computerized trading we’re so familiar with now may have had its roots in the 1987 crash.
Wikipedia: The most popular explanation for the 1987 crash was selling by program traders. U.S. Congressman Edward J. Markey, who had been warning about the possibility of a crash, stated that “Program trading was the principal cause.” In program trading, computers perform rapid stock executions based on external inputs, such as the price of related securities. Common strategies implemented by program trading involve an attempt to engage in arbitrage and portfolio insurance strategies.
Economist Richard Roll believes the international nature of the stock market decline contradicts the argument that program trading was to blame. Program trading strategies were used primarily in the United States, Roll writes. Markets where program trading was not prevalent, such as Australia and Hong Kong, would not have declined as well, if program trading was the cause. These markets might have been reacting to excessive program trading in the United States, but Roll indicates otherwise.
The crash began on October 19 in Hong Kong, spread west to Europe, and hit the United States only after Hong Kong and other markets had already declined by a significant margin. Another common theory states that the crash was a result of a dispute in monetary policy between the G7 industrialized nations, in which the United States, wanting to prop up the dollar and restrict inflation, tightened policy faster than the Europeans.