it has become known—that the market almost failed. After opening up
over 10 percent from Monday’s low, the market began to plunge by
midmorning, and shortly after noon it fell below its Monday close. The
S&P 500 Index futures market collapsed to 181—an incredible 40
points, or 22 percent, under the reported index value. If index arbitrage
had been possible, the futures prices would have dictated a Dow at
1,450. Stock prices in the world’s largest market, on this calculation,
were off nearly 50 percent from their high of 2,722 set just seven weeks
earlier.
It was at this time that near meltdown hit the market. The NYSE
did not close, but trading was halted in almost 200 stocks. For the first
time, trading was also halted in the S&P 500 Index futures in Chicago.
The only futures market of any size that remained open was the
Major Market Index that traded on the Chicago Board of Trade and rep-
resented blue-chip stocks similar to the Dow Industrials. These blue
chips were selling at such deep discounts to the prices in New York that
values proved irresistible to some speculators. And since it was the only
market that remained open, buyers stepped in and futures shot up an
equivalent of 120 Dow points, or almost 10 percent, in a matter of min-
utes. When traders and the exchange specialists saw the buying come
back into the blue chips, prices rallied in New York and the worst of the
market panic passed. A subsequent investigative report by the Wall
Street Journalindicated that this futures market was a key to reversing
the catastrophic market collapse.^2THE CAUSES OF THE OCTOBER 1987 CRASH
There was no single precipitating event—such as a declaration of war, a
terrorist act, an assassination, or a bankruptcy—that caused Black Mon-
day. However, worrying trends had threatened the rising stock market
for some time: sharply higher long-term rates caused by a falling dollar
and the rapid development of a new strategy, called portfolio insurance,
that was designed to insulate portfolios from a decline in the overall
market. The latter was born from the explosive growth of stock index fu-
tures markets detailed in the previous chapter, markets that did not even
exist six years earlier.CHAPTER 16 Market Volatility 273
(^2) James Stewart and Daniel Hertzberg, “How the Stock Market Almost Disintegrated a Day after the
Crash,”Wall Street Journal, November 20, 1987, p. 1.