Black Monday: The Stock Market Catastrophe of October 19, 1987

Of Interest:

AMEX: A History of the American Stock Exchange

Panic on Wall Street: A History of America's Financial Disasters

The Big Board: A History of the New York Stock Market

This spellbinding book chronicles the devastating market crash of October 19, 1987. The events of the day, as well as the factors that combined to produce the crash, are described in a fast-moving vignette written in journalistic style. A behind-the-scenes look at the persons and institutions who were the key players in the crash gives the reader great insight into how it happened, how it was stopped and by whom, and what the consequences were that affect us even to this day. One key issue was "index arbitrage," a dangerously volatile trading strategy that has increased substantially in 2003. Black Monday is also especially timely in light of the 2003 scandal over the New York Stock Exchange Chairman's pay.

The '87 crash was greatly exacerbated by a complex, dangerously volatile trading strategy called "index arbitrage" -- which had come to account for one in every 10 shares traded on the New York Stock Exchange. By 2003, index arbitrage was accounting for an average of 3.5 of every 10 shares traded there. Black Monday also is especially timely today in light of the 2003 scandal over the Exchange Chairman's pay, a scandal that has produced rising pressure from the Exchange's enermies to scrap its traditional human-based auction approach to trading securities. For as the book points out, that human-based NYSE's market making approach was central in ending the crash just past midday on Tuesday, October 20, 1987.

Metz uses his twenty-three-year career as a journalist with the "Wall Street Journal" to good effect in this account of the worst stock-market crash since 1929. Chapters and sections within them begin by noting date and location in the style of newspaper reports--e. g., "October 19, 1987 - New York Stock Exchange, chairman's office, 10:45 A.M."; "August 25, 1987 - Storefront broker's office near Canal Street, 11:30A.M." This has the effect of dramatizing the collapse, events surrounding it, and varied individuals playing key roles in trying to deal with it and affected by it. A hotel in Paris, a roadway leading to the Caracas, Venezuela airport, the White House, and the Chicago Mercantile Exchange are other locations. Like a camera panning from one scene to the next, Metz's style keeps the drama high and the story moving. Even though the generalities of this historic stock-market event are known, one is drawn into Metz's telling by its inside-story perspective and to find out how the main characters act as the event unfolds and how things turn out for them in the end.

Two of these main characters are John Phelan, chairman of the New York Stock Exchange at the time, and Donny Stone, an NYSE trading specialist. The book opens with Phelan in his chairman's office in a meeting with the heads of Salomon Brothers, Merrill Lynch, Goldman Sachs, and other top financial and securities firms. They are all extremely concerned about the 235-point stock-market decline of the preceding week. And they have different thoughts on its causes, import, and appropriate responses to it. After seeing the havoc in the stock market of the previous week, Donny Stone cuts short his vacation in Florida to hurry back to New York to take care of his business as best he can in the circumstances which are having repercussions not only at the NYSE, but also in Washington, D. C., across America, and around the world.

The long-term crippling consequences that Wall Street's top leaders and high government officials feared the worse were avoided by a combination of enlightened quick remedies, lowering of fears, expertise and professionalism among numerous individuals in positions high and low, and opportunism among many who saw new opportunities in the havoc. While the worst consequences of the sudden, unexpected, chaotic collapse were avoided and normal order and predictability returned to the financial markets before long, "Black Monday" brought essential changes to the NYSE and the business of trading. Most of the public were not aware of these changes as normal operations returned over the following weeks. But they were unmistakable to insiders; and many individuals connected to Wall Street for decades were hurt by the changes. At Metz's paper, the "Wall Street Journal," some staff were let go because of the reduction in advertising and circulation following the crash. But apart from countless individuals who lost their jobs from the dislocations caused by the crash, the business of trading had a sea change.

"Black Monday" brought to light the degree to which traders and trading had come to dominate the modern-day stock market. Of course, trading in stocks had always been the NYSE's reason for being. But as the market crash evidenced, trading had taken on a life of its own. Trading calculations, as seen especially in risk arbitrage, had become so sophisticated and easy to execute that market weaknesses being exploited were publicized widely and quickly. Along with this, the volume of stocks traded and the speed with which financial transactions occurred with advanced communications made the market more mercurial and unmanageable than it had ever been. The very image of trading had been changed within the financial community. As William Simon, the former Secretary of the Treasury, noted, when he first entered investment banking, "trading was not a respectable profession." But by the time of the 1987 disaster and even more so in the years after it, "kids out of B-school are dying to get to the trading desk." Trading has become a high-profile, quasi-glamorous subject in the daily financial and business media. And to the graduates of business schools, it is seen as the field where the most money can be made most quickly and easily.

Tim Metz captures all of the dimensions and human drama of this watershed event in the history of the New York Stock Exchange. He closes with the Cassandra-like note that instead of trying to control the astonishingly high levels of trading in short periods of time which was a major cause of Black Monday, the NYSE with the guidance and support of the Security Exchange Commission (SEC) increased the capacity for trading.

After more than 20 decades with "The Wall Street Journal," Tim Metz is now the head of his own firm in the areas of financial communications and media relations strategy and execution.

Former Wall Street Journal writer and current financial communications consultant Tim Metz takes you up to and through the stock market crash of October 19 and 20, 1987, by looking into the minds of eyewitnesses and participants closest to the event. He introduces you to specialists on the NYSE, traders in the Chicago pits, government officials who monitor the country's finances, and exchange officers who have responsibility to oversee securities trading, all who played a part in what happened.

Although the blame for the mania leading up to the crash, and the crash itself, can be spread around to many contributing factors, especially portfolio insurance (a dumb idea) and program trading (index arbitrage), one clear hero emerges in the person of NYSE chairman John Phelan. Metz assigns him prime responsibility for having the foresight and stamina to keep the exchange open in the face of incredible pressure to close it by practically all others concerned. This brave act probably prevented a worse panic and the resulting loss of confidence in markets in the future.

The main point of Metz's investigation centers around the "second" panic of mid-morning Tuesday, October 20. I was a member of the Pacific Stock Exchange at the time, and Metz is correct in stating that as the market began to roll over after a strong opening, professionals became transfixed with fear that maybe we were really beginning to see the wheels come off for good. As Fred Sanford would have said, "This is the big one, Elizabeth!" We had survived the expected Monday "crash," and Tuesday should have seen some sensibility returning to the action, especially with the Dow having fallen some 37% from 2700 to support at around 1900. But the strong opening quickly gave way to new waves of selling that seemed to have no end. Even those of us who had begun the week short were deluged with so many sell orders that we quickly became net long...and net losers.

The Merc's S&P pit halted trading, as did many Dow stocks in NY. Then, miraculously, out of nowhere, the MMI pit on the CBOT caught a bid. Prices recovered. And that was the bottom - 12:30 in NY, 11:30 in Chicago, 9:30 in San Francisco. Metz implies that "manipulation" (government ?) may have had a hand in the turn, as have many other commentators since then. But it may just as well have been Adam Smith's unseen hand stepping into the momentary void vacated by sold-out sellers. We'll probably never know for sure. Whatever it was, it saved the day. As Metz aptly points out, the market is as much a psychological creature as it is a function of supply and demand, and a heroic gesture at the right moment can turn the tide of battle.

The book is laid out like a shipwreck disaster movie, which begins by introducing a representative cross-section of passengers and crew, then follows them as imminent danger eventually engulfs everyone's lives. Who will survive and who will perish?

It's a good read. But the real enjoyment comes at the end when you realize that so many people you've been following and care about worked in cooperation to keep the market afloat, and that critical decisions made under intense pressure preserved the system we have today.

The market treaded water for the next few years as it repaired the damage, then took off on an eight-year 9800-point Dow rally that would have never been possible except for the brave actions by the people who took charge to preserve the integrity of the market when it was under its most frightening assault.

After a twenty-three year career at The Wall Street Journal, Tim Metz left in January 1989, months after the book was published, to begin a now 15-year career as a top Madison Avenue financial, corporate, and crisis management advisor. In 1998, he started his own financial communications and media relations strategy and execution firm, today known as Hullen Metz & Co. LLC. Mr. Metz earned his bachelor's and master's degrees in Journalism at Marquette University in 1961 and 1966, respectively. He is married to Geraldine Fabrikant, a Senior Writer at the New York Times, and lives in New York City.