Black Monday

Was looking at the historical stock market crashes and this one was particularly interesting.

Black monday refers to Oct 19th, 1987. The stock markets around the world crashed on this day, starting from Hong Kong. It was the largest percentage of one-day-decline in stock market history (declining over 22%).

The mysteriousness was as bad as the crash. For many years after the event, debates as to why the crash occurred reached no conclusion. One major reason quoted by many is the faulty program trading.

The programs performed rapid trades and engaged in arbitrage strategies. This resulted in a bubble where stock prices went up which made the crash imminent. The programs that engaged in portfolio insurance strategies took advantage of this and were forced to sell every time the stocks went down. This led to panic selling and a stock crash.

The concept of circuit-breakers was introduced post this to curb this proportion of panic selling. The idea is that the circiut breaker period will help cool off and dissipate the panic sentiments.
At the start of each quarter, the NYSE sets three circuit breaker levels at levels of 10%, 20%, and 30% of the average closing price of the Dow Jones Industrial Average for the month preceding the start of the quarter, rounded to the nearest 50-point interval.


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