Today is the day that the stock market crashed in 1987. As is typical, Democrats seized on the moment to say Reagan’s policies stunk. Fortunately, we all remembered the prior President.
It was a one-day event. But, it sent shock waves that persist to this day.
For example, you cannot read some financial press without someone somewhere predicting a crash. It happens every day now. Broken clocks are right a couple of times a day.
Trading strategies around a crash abound. The book The Black Swan is devoted to talking about how to position to take advantage of market crashes. Those strategies are expensive.
The 1987 crash gave birth to the “buy gold and silver” movement that persists in conservative media to this day. Gold and silver are absolutely horrible investments and not stores of value.
The 1987 crash gave birth to thousands of conspiracy theories about the Federal Reserve and the banking system. They aren’t true.
The leading exchanges got together and put in circuit breakers. It was a good idea. Those circuit breakers gave rise to conspiracy theories that “the stock market is rigged to go up.” Actually, it’s the market power of the US companies listed on stock exchanges competing, innovating, and doing well that causes the market to go up. Markets do go into bear markets, but over the long term never go short America.
For what it is worth, we are still in a bear market today.
I was clerking in the Eurodollar Pit ($GE_F) that day. Spreads were 20 points wide on a contract that normally moved about 5 ticks in a day. One tick was worth $25, so the bid/ask spread on a notional million-dollar short-term interest rate contract was $500.
It was my first day back at work. I had been enjoying the fruits of my wife’s labor on an awards trip she earned.
Every day after the close, I had to do all the options traders’ positions in our group. Usually, I was done by 5 PM. I’d get there at around 5:30 AM to do their outtrades before the open at 7:20 AM CT. After Black Monday, I was there until midnight. I drove home, slept two hours, and was back on the floor at around 3:30 AM. I was doing outtrades right up until the opening bell.
On October 20th, we opened 300 points higher. I know two locals that sold 1000 contracts each on the open. In minutes, they were up $1MM. Lewis Borsellino grew up in my neighborhood. He blogged about the day before Black Monday here. I know another local that was short S+Ps and long T-Bills. He cashed out that week, sold his seat, and retired to Arizona. I think he was 30. Fortunes were made that day.
Here are some other stories from people I know.
If you know old dinosaurs that worked on the trading floor back then, ask them about it. It is still the single scariest day of anyone’s trading career I bet. We didn’t know if the financial system could endure it and we didn’t know if we’d have jobs after.
My boss made $1MM that day. I had outtrades that moved the needle by $100k or more. He’d ask me to quote a market and I’d quote it. He’d do a trade and tell me to buy or sell 100 contracts and we’d move the market 10-15 points more. It was insane.
You’d just have to laugh.
I saw brokers try to fill five lot orders and their hands shook so hard they couldn’t fill out the trading cards.
We never had trade checkers on the trading floor before Oct 1987. After that, it was part of your ongoing costs. For those not in the know, when you were on the floor you’d make a trade with someone and then shout at them after you carded it up, “checking I sold/bought xx from you at xxxx”. It wasn’t good enough after Black Monday.
The guys in the photo are all friends of mine. See the one on the far left? It was his first day clerking in the pit. Helluva baptism. Plus, anyone that knows hand signals can see that the market they were quoting was 9 bid at 1. 2 ticks wide! Super tight for that day.
By the way, those guys in the photo could double as 1970s era porn stars with those moustaches
My six months of running and clerking at the Merc ended in April (I think) of 87. By the time of the crash I was a paralegal at Neal, Gerber, Eisenberg & Lurie (as it briefly was) at 208 S. LaSalle, across the street from the Board of Trade. One of my colleagues had the radio on and said that the financial world was melting down. We decided to walk over to the visitors gallery at the CBOT to watch the close. I said, "if this is a crash like 1929, and a Depression and World War come next, we can say we watched the market close on Black Monday." It looked very hectic down there, certainly, but not necessarily historic. Fortunately, the world did not go into a tailspin after that crash.