Stock exchange trader at the end of the day on Black Monday, Toronto 1987
On that single day, the Dow Jones Industrial Average, the pulse rate of the most prominent stock market in the world, fell a heart-stopping 22.6 percent, still the largest one-day decline in Wall Street history.
Until 1987, a very bad day in the stock market meant a decline of 4 or 5 percent. A horrible day meant a drop of 10 or 11 percent, a figure exceeded only during the historic crash of 1929. Then, on Black Monday, the unthinkable suddenly became unforgettable, a market crash so steep and so fast it seemed that the entire financial system would simply shake apart like an airplane plunging to earth.
On that day, the new toys of Wall Street, derivatives and computer-assisted trading, fed a justifiable fear that an overdue market downturn would become an uncontrollable meltdown. The avalanche of selling briefly halted a key Chicago market and came within minutes of officially shutting down the New York Stock Exchange.
Hong Kong closed its market for a week. Tokyo and London, financial centers almost on par with New York, were battered. The aftershock hit days, weeks, and even months later. It took two years for the market to climb back to its 1987 peak.
Black Monday was the product of profound but poorly understood changes in the shape of the marketplace over the previous decade. Wall Street (shorthand for the nation’s entire financial industry) had become a place striving to get both bigger and broader, seeking profit in as many diverse markets as possible.
Meanwhile, Wall Street’s clients had undergone a staggering mutation: they were exponentially larger and more demanding, and they became far more homogenized, subscribing confidently to academic theories that led giant herds of investors to pursue the same strategies at the same time with a vast amount of money.
As a result of these two structural changes, government regulators in Washington faced a new world where, time and again, a financial crisis would suddenly become contagious. Thanks to giant diversified firms and giant diversifying investors, a failure in one regulator’s market could spread like a wind-borne plague and infect those overseen by other regulators. After years of these outbreaks, Black Monday was the contagious crisis that the system nearly didn’t survive.
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