Black Monday 1987: the day the Dow fell 22.6%

1. August 1987After a strong rise since the start of the year, the Dow Jones Industrial Average reaches its peak in late August.
2. 14–16 Oct 1987Three days of falls in New York, from Wednesday to Friday. Institutions using portfolio insurance are left with selling still to do.
3. 19 Oct, morningMarkets in Asia and then Europe fall before New York opens. At the opening, sell orders are so heavy that many large shares do not begin trading for an hour or more.
4. 19 Oct, closeThe Dow closes down 508 points, a fall of 22.6% in one day. Share-index futures in Chicago fall further still, and order systems run far behind.
5. 20 Oct 1987Before the opening the Federal Reserve states that it stands ready to supply liquidity. Around midday trading in many shares and futures all but stops; then prices turn up, helped by companies announcing purchases of their own shares.
6. 20–23 Oct 1987The Hong Kong stock exchange stays closed from Tuesday to Friday. Other markets remain open and unsettled.
7. January 1988The Presidential Task Force on Market Mechanisms, known as the Brady Commission, reports. It treats shares, futures and options as one market and recommends co-ordinated trading halts.
8. October 1988Circuit breakers come into force in New York and Chicago: rules that pause trading when prices fall by a set amount in a day.

• Circuit breakers were introduced in 1988. They pause trading across the market after a large fall, to give people time to find out what is happening and to let orders catch up. The thresholds have been revised several times since.
• The Brady report’s central finding was that the share, futures and options markets are a single market in practice, and that rules and margin arrangements needed to be co-ordinated across them.
• Clearing and settlement systems were strengthened after it became clear how close some clearing arrangements had come to failing on 20 October.
• The Federal Reserve’s statement on 20 October became the model for how a central bank responds to a market panic: by making clear that the banking system will have the cash it needs.

• A selling rule that is sensible for one firm can be destabilising when many firms follow it at once. Portfolio insurance assumed there would be buyers at each step down; on the day there were not.
• Liquidity is not a fixed property of a market. On 19 and 20 October it was scarce exactly when it was most wanted.
• The fall had no single piece of news behind it. A very large move does not need a very large reason.
• The Dow ended 1987 slightly higher than it began. The size of the worst day says little about the year around it, in either direction.

These are observations about how markets and rules work, drawn from one episode. They are not advice, and they do not say that anything like it will or will not happen again.

It is easy to judge an episode once its ending is known. This exercise takes three moments from the timeline above, one at a time. At each it shows only what had been made public by then, asks a hypothetical question with three plain choices, and then shows what came next and what each choice would have meant.

The text headed “what had been made public by then” is this site’s own summary of the record, written afterwards. It is not a contemporary document and nothing in it is a quotation. The position described is imagined. No choice is marked right, there is no score, and nothing is stored.

A hypothetical for study, not advice. It does not say what anyone should have done then, or what to do now.

The cause is still argued over. The Brady report gave a large part to portfolio insurance and index arbitrage; other studies put more weight on the news of the preceding week, on overseas selling, or on the market simply having risen too far. The figures given for the day, 508 points and 22.6%, are not in dispute.

How much did the market fall on Black Monday 1987?

The Dow Jones Industrial Average fell 508 points on 19 October 1987, which was 22.6% of its value. It is the largest one-day percentage fall in the index’s history.

What caused Black Monday?

There is no agreed single cause. The official inquiry, the Brady Commission, pointed to automatic selling by institutions using portfolio insurance and to the link between the futures and share markets. Others stress the bad news of the week before and selling from overseas. Most accounts treat it as several things together.

What is a circuit breaker and why was it introduced?

A circuit breaker is an exchange rule that pauses trading when prices fall by a set percentage in a day. Circuit breakers were introduced in the United States in 1988, on the recommendation of the Brady Commission, so that a fast fall would be interrupted and orders and information could catch up.

• Liquidity
• Volatility
• Index
• Hedging
• Slippage

The report of the Presidential Task Force on Market Mechanisms of January 1988, the Federal Reserve’s history pages, and the published record of the Dow Jones Industrial Average.

A number is given on this page only where it is famous and certain. Nothing here is a quotation.