Black Monday

Posted in Finance, Accounting and Economics Terms, Total Reads: 459
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Definition: Black Monday

On the Monday of October 19th, 1987, Dow Jones Industrial Index (DJIA) fell 22.4% in a single day. The ripple effect which began with fall in Hong kong and Singapore stock indexes ultimately reached throughout the world.

 

However, the DJIA was positive for the most part of 1987. It is biggest single day fall in DJIA history. Factors for fall included - program trading, overvaluation and market psychology. Program trading resulted in rapid selling of stocks due to overall fall in the stock market.

 

With the advent of computers, the program trading became prominent in trading houses. US congressman Edward Markey had predicted that program trading will be a major cause of financial crises even before the black Monday.

 

Federal government motivated the banks to lend to each other at normal rates which played a major part in recovery. Stock exchanges also implemented circuit breakers to halt trading in case DJIA fell by 7%, 13% and at 20% to allow traders to make an informed decision whether to exit the market or not.

 


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