On Monday, October 19, 1987, the Dow Jones industrial average dived more than 500 points, and the New York Stock Exchange (NYSE) experienced a record volume of 604.33 million shares, following a record Friday volume of 330 million shares.
The Dow plunged 22.6 per cent to 1,738.74, which was far greater than the 12.8 per cent decline on the original Black Monday, October 28, 1929.
Experts were mystified because no major financial news or announcements seemed to set off the increased selling. President Ronald Reagan told the press, "I think everyone here is a little puzzled because ... all the business indices are up. There is nothing wrong with the economy."
Treasury Secretary James Baker suggested a Democratic bill to increase taxes, which had just passed House and Senate committees, helped bring about the disaster. Other possible explanations included fears of conflict in Iran, the US trade deficit, the federal budget deficit and fears of inflation and a weakening dollar.
But the favorite scapegoat was programmed trading. The ability to automatically trade large blocks of stocks or index futures allowed a massive amount of transactions to be fed to the trading system. The increased availability of up-to-the-minute market data and the increased processing speed available with computers allowed traders to trade large amounts of stocks and futures at target prices within just minutes.
On October 16, the trading system was halted briefly because of capacity problems caused by program traders handling $US80 billion in pension funds. The shutdown increased the sense of panic brought on by the Dow's reaction to the increased trading and brought on another wave of selling that backlogged the system. The systems that processed and printed the orders on cards became clogged, further panicking traders.
Earlier in the month, Securities and Exchange Commission President David Ruder gave a speech in which he addressed the volatility of the market. He said programmed trading had made the stock market too complicated to regulate. He said he worried that traders would be able to manipulate the market with sophisticated buy/sell schemes. After the crash, this worry intensified.
Programmed trading was suspended for the week, and a presidential commission was convened. In January 1988, the panel's findings caused the NYSE to impose restrictions on day trading for at least one week on any day the Dow moved more than 75 points.
Pressure to fix the problem was placed on the Securities Industry Automation Corporation (SIAC), which operates computer systems for the NYSE. The SIAC upgraded processors, memory, disk capacity and switches and changed control and processing software to handle increased capacity. The number of listed stocks available for computerised trading was also increased, decreasing the dependency on printed cards.
Ironically, the SIAC knew changes were needed and how to make them. On Black Monday, the American Stock Exchange (AmEx) went live with its new double-capacity market data system. The system, also supplied and maintained by the SIAC, helped the exchange largely escape the damage sustained by the Dow and other markets. With the experience gained from successful implementation of the AmEx system, the SIAC could quickly upgrade the NYSE.
In July 1988, Charles McQuade, president of the SIAC, told Computerworld, "If a 600 million-share day occurred now, it could be handled with style and grace."