Black Monday 1987

[Nearly Sane]

It will be 29 years ago tomorrow, and was the subject of a piece on the Adrian Chiles programme with people who went through it. The general consensus was that it 'couldn't' happen now with lots of blame being put on an overvalued stock market, inflated by takeover activity, and a lack of control or understanding of the derivatives market.

The week before Black Monday, I started my permanent job at the London International Futures and Options Exchange, LIFFE, training people on the new trade matching system. The exchange's record day in terms of volume was 60k at that time. On the Monday it was 140k, the Tuesday 180k. The mood was more frantic stunned than out and out panic. The sheer scale of what was happening out with the experience of nearly everyone. As someone just starting, it was hugely exhilarating, and somehow fitting after the strange calm of the Friday caused by the hurricane on the Thursday night.

But 29 years later, I am not as sanguine as those interviewed, things are more regulated but immensely more complex. The scale of derivatives trading, the complexity of many of the instruments traded are not understood by the regulators or the vast majority of traders. 11 years after Black Monday we had the collapse of LTCM, a hedge fund run in part by 2 Nobel economic laureates, given for their risk management work.  And 10 years after that a crash caused by banks having no understanding what the effect of a relatively small move in values could have in their immensely overleveraged world.

Systems and regulations are built for the understanding of markets that caused the last problem, sometimes the last problem but two. The moment someone tells you it cannot happen as bad, or again, is the time for a wry laugh and making sure your cave is well stocked.





http://this-day-in-history.net/tag/Black_Monday/

[jeremyp]

I agree with you entirely.

The general consensus was that it 'couldn't' happen now with lots of blame being put on an overvalued stock market, inflated by takeover activity, and a lack of control or understanding of the derivatives market.

Really? And how do we know an overvalued stock market couldn't happen or that we have control and understanding of the derivatives market. I put statements like that in the same category as Gordon Brown's "no more boom and bust" i.e. false.

Another reason I take exception is that it has happened again. I googled Black Monday and found that the FTSE 100 lost about a third of its value. Well, it lost a third of its value in the 2008 crash too. I distinctly remember looking at my ISA statement and finding that it was worth less than I had put in.

[Nearly Sane]

One of the slightly weird ideas that was put forward is that the ability to communicate better somehow this would stop such things happening, but the communication increase has also increased exponentially the information and risk that needs to be be controlled.

[jeremyp]

One of the slightly weird ideas that was put forward is that the ability to communicate better somehow this would stop such things happening

Just as likely to make things worse. After all, it was an improvement to communications that helped trigger Black Monday.

but the communication increase has also increased exponentially the information and risk that needs to be be controlled.

All you need is a positive feedback loop and we're done. With modern automated trading systems that take decisions by the millisecond, it could be all over before a human has even noticed it is happening.