Did someone say BOOM?
This article brings my perspective on the stock market crash in 1987, covering everything from how stock exchanges work to the actual events that happened in 1987 and the underlying triggers. I shall try my best to be clear and brief, but to get a proper understanding some parts may need an in-depth exposure.
Stocks & Stock-Exchanges
A stock is a paper, or in more recent times an electronic file. It is literally an asset of a company. So if you own a stock paper, you own a part of a company. Owning a part of a company gives you many rights regarding the company, such as a share of the profits and a vote at important company meetings. These rights are different from company to company though.
A stock-exchange is where people go to buy and sell stocks. However these people are far from ordinary. They are hardcore stock-traders and brokers. They are analytics spending day in and day out viewing diagrams and numbers. This is the core of the stock-trading branch.
In theory the trading of stocks is quite simple. A stock always has an owner. This owner can sell the stock at whatever price, he or she may wish, but there is no guarantee that anyone would want to buy it. Naturally the lower the stock price, the more people would like to buy it and the higher the stock price, the less people would like to buy it. However a lot of circumstances play in when trading stocks. Among these circumstances are the company, popularity, volume and expectations.
The Golden Big Apple
The largest and most famous stock-exchange in the world is probably the New York Stock Exchange (NYSE). It has been around for almost 2 centuries, and has survived several stock-market crashes. It has the largest stock-exchange volume in the world, holding 28.1 trillion dollars. Almost anybody who ever set a foot in the stock-market knows of it.
Computers In Action
Computers play an important role in almost any business, but especially in the stock-trading branch. It was almost rushed into the many stock-exchanges, since the power of computers was necessary to keep track of the many hundreds and thousands of stock trades being made everyday. Today almost all stock-exchanges use computer power to automate the whole stock-trading process. There are of course still people in the stock-exchanges to supervise the many transactions and to set up custom deals.
Computers are not only used to organize transactions and trades, they are also used to trade themselves. Believe it or not. Hundreds of computers around the world, sit on millions of dollars, and decide how to buy and sell stocks. Some of them are supervised by humans, but others run freely on their own, using many different mathematical calculations. Their only purpose is to make their owners rich – and they really do. However they are not magical and they can’t create more money. Because of the stock market nature, for every winner there is a looser. We can’t all be millionaires. So the money these machines actually collect, are the money from other people - typically people not using computers.
BOOM
A stock market crash is when a stock market falls dramatically in an incredibly short time, and this is exactly what happened on Monday the 19 of October 1987. As you can see on the picture to the right, the Dow Jones Index lost 30% of its value, in one sharp line. Millions of dollars was lost. Where did it go?
The crash came with a shook, and by the end of the month, stock markets around the world had declined with 10% to 50%. The experts didn’t have a clue. There were no signs or indications that could create this boom. So why did it happen?
Why, why, why...
There are many theories trying to explain the crash. The most popular and probably most likely, if you ask me, is the one about computers. You see, computers had just started appearing in larger amounts in 1987. While computers did not find their way to the ordinary homes, they were still extensively used by corporations and stock traders. These computers could have triggered the stock market crash in 1987 with their automatic trading. From here the market took over, and just kept selling and selling, as everyone believed another market crash was on the way. Computers probably also tricked themselves to follow the selling loop, and keep the loop going. Apart from this I also believe that, in this time, where computers were few, the few computers around had access to large sums of money and great influence in the market. Is it not likely, that the computers with this great influence could affect the market negatively?
Aside from the computer program theory, there is also a theory stating that the crash happened due to a great storm. This great storm prevented traders in London, the Friday before the market crash, from reaching the stock-exchanges and closing their stock positions. This could very well be the case, but I find it more likely that computers started the crash, since America had a greater influence in the world back then. This greater influence could then also explain why it affected countries from around the world.
Another theory, one I believe would be next likely, is the one about a large amount of sell orders being placed within a very short time. Different stock traders, brokers and institutions could have placed many selling orders within a short period of time, and tricked the rest of the market traders to start thinking that the stocks were declining. This too would create a downward spiral, and exaggerate the effect greatly.
Today
Today there are many more computers on the stock market, trading and making more money, than ever before, but they are not making the market crash. They are only making sure that people jumping into trading stocks with a light heart returns with a big disappointment. The stock market today is something special and different from what it used to be, and yet nothing really changed. The only thing we can truly be sure about, is that there have been market crashes and due to the nature of humans we probably haven’t seen the last stock market crash one yet.
A Final Glance
Let me sum it all up. The world of stock markets is made of stocks, small papers, which gives you ownership of the companies. To buy and sell these stock papers you need a stock-exchange, which will execute your orders. The selling price of a stock is decided by its owner, but there is no guarantee that anyone will buy it. This is due to the inner workings of the stock market - supply and demand.
Computers play a major role in stock markets. They are used to organize the stock-exchanges and give them the ability to take thousands of orders every day. However, computers are also used to buy and sell stocks. They are stock traders, using mathematics to pick the best stocks, but keep in mind: whenever a computer wins money, someone else losses money.
Then in 1987, the stock market crashed. There were no signs, no indications - just a big boom. It happened most suddenly in the U.S, but stock markets around the world were crashing too. People were shocked.
Theories conclude that computers may have been behind the stock market crash. Computers trading the stock market would have enough influence to cause the crash, simply by placing selling orders and creating a negative spiral loop. Other theories blame the storm in London, which happened the Friday before the boom. Yet another theory claims that a large amount of selling orders placed by random traders, would have created a negative spiral. This negative spiral would then be exaggerated by both human traders and computers. But we'll never truely know.
This article was written by Julian Serban.
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