When Is the Stock Market Overvalued? Technical Aspects of Crashes (1987)

In finance, Black Monday refers to Monday, October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average (DJIA) dropped by 508 points to 1738.74 (22.61%).

In Australia and New Zealand the 1987 crash is also referred to as Black Tuesday because of the timezone difference. The terms Black Monday and Black Tuesday are also applied to October 28 and 29, 1929, which occurred after Black Thursday on October 24, which started the Stock Market Crash of 1929.


The May 6, 2010 Flash Crash[1] also known as The Crash of 2:45, the 2010 Flash Crash, or simply the Flash Crash, was a United States stock market crash on Thursday May 6, 2010 in which the Dow Jones Industrial Average plunged about 1000 points (about 9%) only to recover those losses within minutes.[2] It was the second largest point swing, 1,010.14 points, and the biggest one-day point decline, 998.5 points, on an intraday basis in Dow Jones Industrial Average history.

The fat-finger theory: In the immediate aftermath of the plunge, several reports indicated that the event may have been triggered by a fat-finger trade, an inadvertent large “sell order” for Procter & Gamble stock, inciting massive algorithmic trading orders to dump the stock; however, this theory was quickly disproved after it was determined that Procter and Gamble’s decline occurred after a significant decline in the E-mini S&P 500 Futures contracts.[23][24][25] The “fat-finger trade” hypothesis was also disproved when it was determined that existing CME Group and ICE safeguards would have prevented such an error.[26]
Impact of high frequency traders: Regulators found HFT’s exacerbated price declines. As noted above, regulators found that high frequency traders exacerbated price declines. Regulators determined that high frequency traders sold aggressively to eliminate their positions and withdrew from the markets in the face of uncertainty.[10][11][12][13] A July, 2011 report by the International Organization of Securities Commissions (IOSCO), an international body of securities regulators, concluded that while “algorithms and HFT technology have been used by market participants to manage their trading and risk, their usage was also clearly a contributing factor in the flash crash event of May 6, 2010.”[27][28] Other theories postulate that the actions of high frequency traders (HFTs) were the underlying cause of the flash crash. One hypothesis, based on the analysis of bid-offer data by Nanex, Llc., is that HFTs send non-executable orders (orders that are outside the bid-offer spread) to exchanges in batches. Though the purpose of these orders is unknown, some experts speculate that their purpose is to increase noise, clog exchanges, and outwit competitors.[29] However, other experts believe that deliberate market manipulation is unlikely because there is no practical way in which the HFTs can profit from these orders, and it is more likely that these orders are designed to test latency times and to detect early price trends.[30] Whatever the reasons behind the possible existence of these orders, this theory postulates that they exacerbated the crash by overloading the exchanges on May 6.[29][30] On September 3, 2010 the regulators probing the crash concluded: “that quote-stuffing – placing and then almost immediately cancelling large numbers of rapid-fire orders to buy or sell stocks – was not a “major factor” in the turmoil.”[31] Some have put forth the theory High-frequency trading actually has been a major factor in minimizing and reversing the flash crash.[32]
Large directional bets: Regulators say a large E-Mini S&P 500 seller set off a chain of events triggering the Flash Crash, but did not identify the firm.[10][11][12][13] Earlier, some investigators suggested that a large purchase of put options on the S&P 500 index by the hedge fund Universa Investments shortly before the crash may have been among the primary causes.[33][34] Other reports have speculated that the event may have been triggered by a single sale of 75,000 E-mini S&P 500 contracts valued at around billion by the Overland Park, Kansas firm Waddell & Reed on the Chicago Mercantile Exchange.[35] Others suspect a movement in the U.S. Dollar to Japanese Yen exchange rate.[36]
Changes in market structure: Some market structure experts speculate that, whatever the underlying causes, equity markets are vulnerable to these sort of events because of decentralization of trading.