What caused Black Monday (1987) and why was it so bad?

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What caused Black Monday (1987) and why was it so bad?

In: Economics

Looking into this the exact cause of the stock market crash on Black Monday isn’t clear.

There was a bit of a bubble in the market at that point and the US central bank was dropping interest rates that week due to a problem with the value of the US dollar.

The key thing that occured that day was the affect of computerized trading. Computerized stock trading was a relatively new thing at that point and no one understood the risks that posed to the market.

What happened was that when the markets closed on the Friday a situation developed where large numbers of sells orders got queued up by the computers. The algorithms detected a fluctuation in the market which caused them to want to sell their stocks.

When the markets opened on the Monday morning all the sell orders got processed at once. This caused the stock prices to fall and subsequently more algorithms started selling in a chain reaction that saw the market ultimately drop by 20%.

If it wasn’t for the computer algorithms it probably just would have but a mild slump.