What Is Black Monday?

Since 1907, October has seen many black days concerning stock market crashes, associating the month with a perceived market anomaly that stock values tend to slip during October. This is referred to as the October effect. With multiple stock market crashes spanning across decades, a certain Monday of 1987 among other years came to be known as a black day.

What Is Black Monday?

Black Monday commonly refers to the sudden global, unprecedented stock market crash that had severe unexpected repercussions that occurred on Monday, October 19 of 1987. Due to the time difference, In Australia and New Zealand, the day is also referred to as Black Tuesday. Twenty-three major stock markets in the world experienced a downfall in their stock values leading to an immense loss for investors globally.

Data shows that eight markets fell by 20 to 29%, Markets of Malaysia, Mexico, and New Zealand experienced a downfall of 30 to 39%, whereas markets of Hong Kong, Australia, and Singapore saw a decline of more than 40%. The Austrian market was the least affected with only a fall of 11.4% and Hong Kong the most registering a fall of 45.8%. Nineteen in twenty-three major stock markets across the globe had fallen more than 20% with worldwide losses being estimated close to US$ 1.7 trillion. With the unprecedented scale of losses, it was feared that this stock market crash may even lead to a reprisal of another Great Depression.

What caused Black Monday in 1987?

The Dow Jones Industrial Average, DOW saw a steady rise from August 1982 to its peak in August 1987, with a 69% year-to-date rise as of 1987 August. Nineteen of the largest stock markets across the world averaged a rise of 296% during this time frame. The New York stock exchange also saw a rise in trading volume from 32 million shares to 181 million shares. From the latter half of 1985 to the early part of 1986, the United States economy witnessed a shift from a rapid recovery from the recession of 1980 to a slowing rate of expansion, leading to a soft landing period of economic slowdown and a drop in inflation.

The days counting down to Black Monday, witnessed a high pent-up pressure by investors to sell stocks. As a result, the Monday stock market opened to a large imbalance caused due to the high volume difference between sell orders and buy orders, ferociously pushing down stock prices. Stock market regulations in 1987 allowed designated market markers, also referred to as specialists to delay or suspend trading in events of order imbalance exceeding the specialist's ability to fulfil timely orders. Due to the order imbalance observed on Black Monday, 95 stocks on the S&P 500 Index and 11 of 30 stocks of the Dow Jones Industrial Average opened late. Notably, the futures market opened on time to record heavy selling volumes.

On October 19, 1987, Black Monday recorded the fall of DIJA by 508 points, a record fall of 22.6%, the highest one-day drop in the DIJA history, accompanied by crashes in the options market and the futures exchange. The high volume of sell orders, largely during the last 90 minutes of trading on the day, created a steep drop in prices. Citing a large imbalance, multiple stocks on NYSE were halted for trading and delays. 195 of the 2250 plus stocks listed on the New York Stock Exchange, reported trading halts and delays during the day.

The 1987 Black Monday opened up the impact of financial and technological innovation on increasing market volatility. Automatic trading, also referred to as program trading enabled the automatic generation of buy and sell orders based on price levels of benchmarked indexes or specific stocks. The trading program module was modelled to generate more buy orders when stock prices were rising and generate more sell orders with declining prices.

While no singular reason can be attributed to the reason for a stock market crash, multiple factors, along with media amplification of the developments all added to mass panic, further accelerating the days leading to the crash of Black Monday.

Impact of Black Monday

United Kingdom

A violent extratropical cyclone of 1987, also called the Great storm of 1987 caused the unexpected closing of markets in London on October 16. On 19 October, when the markets reopened the FTSE 100 Index saw an accelerated speed of stock crashing 136 points in the first few hours. The FTSE continued to drop down to 23% in the following days, closing in on the same percentage drop, that NYSE had witnessed on the day of the crash. With a slow rate, the market continued to degrade, stooping as low as 36% below its pre-crash peaks in mid-November. The United Kingdom market did not see any recovery until 1989.

Japan

Due to the difference in time zones, Black Monday sometimes is referred to as sometimes “Blue Tuesday” in Japan. The Japanese market albeit impacted by the initial crash was affected mildly. The Tokyo market registered a decline of 14.9% on the first day. Japan saw losses of US$421 billion, ranking just next to New York’s $500 billion, contributing to the total global losses of $1.7 trillion. The Japanese stock market Nikkei 225 Index, saw a recovery back to its pre-crash levels in the next five months. Multiple distinctive Institutional characteristics in Japan such as trading curbs - sharp limits on price movements of a share greater than 10-15%, institutional barriers and restrictions to short selling by domestic and international traders, and many more measures helped Japan dampen the market volatility.

Hong Kong

Hong Kong was the worst hit by the Black Monday crash, registering a drop of 45.8% in the stock market value. The Hang Send Index of the Hong Kong Stock Exchange witnessed its biggest ever single fall by dropping 420 points on October 19, 1987. The fall wiped off HK$65 billion, close to 10% of the stock market value. Sighting the continued decline of the New York stock exchange on the next trading day, the Hong Kong Stock Exchange Committee and the futures exchange committee decided on closing both markets for the following day. The markets continued to remain closed in Hong Kong for four days following Black Monday.

The gruesome impact on the Hong Kong stock market was attributed to the structural flaws in the future exchange, in addition to the inexperience of many traders and brokers.

New Zealand

The New Zealand market continued to ramble under the effects of Black Monday for an extended period even after the majority of global markets had started on the course of recovery. Unfortunately, unlike other economies, the impact of the stock market crash of 1987 crept into degrading its real economy, leading to a prolonged recession.

Regulatory advancements post-Black Monday

Stock Exchanges across the world learned major lessons from the Black Monday crash and multiple regulations were revised to cover up the earlier shortcomings. Regulators for one, overhauled trade clearing protocols to bring uniformity across all prominent market products. New rules, such as trading curbs or circuit breakers were also put in place. These enabled exchanges with the ability to halt trading temporarily in events of an exceptionally large decline in the prices of some indexes, such as the Dow Jones Industrial Average (DIJA(. The trading curbs introduced post-Black Monday, were effectively applied during the 2020 stock market crash.

Lessons From Black Monday and Other Market Crashes

The events of Black Monday in 1987 and subsequent market crashes have imparted valuable lessons to the global financial community. Black Monday, with its unprecedented scale and rapid downturn, highlighted the vulnerabilities in the stock market structure. The high pent-up pressure leading to a significant order imbalance showcased the need for robust regulations. In response, post-Black Monday, stock exchanges worldwide underwent significant revisions. Regulators overhauled trade clearing protocols, aiming for uniformity across market products.

The introduction of trading curbs or circuit breakers became a crucial measure, allowing temporary halts in trading during substantial declines. These lessons from Black Monday proved instrumental during the 2020 market crash triggered by the Covid-19 outbreak.

The regulatory advancements implemented post-Black Monday played a pivotal role in mitigating the impact of Black Monday II in 2020. As global stock exchanges experienced unexpected crashes, the lessons learned from history came into play. Circuit breakers and trading curbs were effectively applied to manage the heightened volatility and prevent further panic. The swift response from banks and reserves, reducing interest rates and offering support to investors, showcased a coordinated effort to stabilize markets.

Global market crashes owe their occurrence to the key factors of media channels' rapid information dissemination and global markets' interconnectedness. Indeed, these lessons go beyond mere regulatory measures. They encompass transparent communication's crucial importance, early intervention strategies deployment – all underpinned by a profound understanding of the intricate relationships between financial markets and external elements. The aftermath of Black Monday emphasized not just continuous vigilance but also adaptability in tackling emerging challenges within financial market dynamics.

Black Monday II (2020)

Stock Exchanges globally crashed unexpectedly on 20 February 2020, due to the growing instability as a result of the Covid-19 outbreak. The stock market exchanges eventually stabilized and the crash ended on April 7, 2020.

Although the crash began on 20 February, stock markets saw an intensified selling spree only during the first half of March. Stock markets saw multiple drops in varying severity daily, with the largest drop being reported on 16 March. The event is now referred to as Black Monday II, sighting a stock market drop of 12-13% across the majority of the global markets.

Two other significant days in this crash of 2020, were 9 March, nicknamed Black Monday I and 12 March referred to as Black Thursday. To manage the panic across the market, Banks and reserves across the world, reduced their interest rates, bank rates, and cash flow rates, whole offering support to investors and the markets.

Black Monday I, on March 9, 2020, saw the United States Dow Jones Industrial Average lose more than 2000 points, being described as “the biggest ever fall in Intraday trading” across international news. Before market opening, the DIJA futures market had reported a 1300 point drop following the news of the Covid-19 outbreak and the fall in oil prices due to the Russia-Saudi Arabia oil price war, resultant of the falling oil prices due to the reduced demand for travel and lack of industrial activity with the Covid-19 pandemic. Post the failure of the OPEC and Russia agreement on oil production cuts on March 6, both Saudi Arabia and Russia announced increased oil production on 7 March, seeing a further fall in oil prices by 25 per cent.