Question

TOPIC: 1987 US BLACK MONDAY.

answer should be more than 5000 words.

Answer 1

Solution

October 19,1987 was known as Black Monday. On that day,all the stock exchanges across the world including,the major stock exchanges - New York,Berlin,London,Tokyo,Hong Kong saw a huge fall of more than 20% during the day.

The reason was attributed to the computer driven trading models that followed a strategy of portfolio insurance.

This strategy of portfolio insurance is to hedge the portfolio losses.In other words when the portfolio begins to fall, in order to limit the loss,the system program automatically places the short-selling orders on stock index futures without the portfolio manager having to sell of f those stocks.

These program placed a lot of short-sell orders once the price went below it's trigger price.This was the time when the automatic program driven trading has been introduced and was starting to be adopted.This resulted in further liquidation leading to further fall in the the market.

So, program based trading was a new adoption way back then.These kind of scenarios may no repeat again atleast in some of the strictly regulated,developed,technolgically driven markets like the US,India,etc.,

For Example,in case of NSE and BSE in India,the regulator has placed many controls like circuit breakers etc.,

For Example,in case of Indian stock exchanges,Circuit breakers are placed at 10%,15% and 20% limits.Whenever a particular stock / entire stock market experiences this kind of variances in a single day,the trade is suspended for a prescribed amount of time and the trade is resumed after that.This leads to control of speculation,more transparency,issue identification,etc.,

When the market / stock reaches the 20% circuit (i.e., market either FALLS / RISES by 20% ) the trade is suspended for that whole particular day.

Generally the market does not function on human logic.it should function on facts and figures but rather it works on speculation and sentiments.

After these kind of regulations still this kind of huge volatilities exist.When the market is very volatile,people loose the faith on the same.They begin to view investing as a betting / lottery with speculation rather than the fundamental reason for the growth in their stocks.This was also the reason for putting these kind of controls.

But still in spite of these regulations,some times markets tend to fall .But this fall / RISE is limited to the maximum circuit limits placed by the regulating bodies across the countries

The markets reach these kind of high volatility when some major global impacting events like global pandemic,geo political tensions like wars,trade policies,govt's international policies,etc take place.

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