Crash of 1987

The Bottom Line

Although program trading contributed greatly to the severity of the crash (ironically, in its intention to protect every single portfolio from risk, it became the largest single source of market risk), the exact catalyst is still unknown and possibly forever unknowable. With complex interactions between international currencies and markets, hiccups are likely to arise. After the crash, exchanges implemented circuit breaker rules and other precautions to slow down the impact of irregularities in hopes that markets will have more time to correct similar problems in the future.8

While we now know the causes of Black Monday, something like it can still happen again. Since 1987, a number of protective mechanisms have been built into the market to prevent panic selling, such as trading curbs and circuit breakers. However, high-frequency trading (HFT) algorithms driven by supercomputers move massive volume in just milliseconds, which increases volatility.

The 2010 Flash Crash was the result of HFT gone awry, sending the stock market down 7% in a matter of minutes.9 This led to the installation of tighter price bands, but the stock market has experienced several volatile moments since 2010. The rise of technology and online trading have introduced more risk into the market.

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