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A Brief History of U.S. Stock
Market Crashes
(Causes, Costs, and Results)
The Crash of 1987
During this crash, 1/2 trillion dollars of wealth
were erased.
Causes of the Crash:
- No Liquidity. During the crash, the markets were
not able to handle the imbalance of sell orders;
- Overvalued Stocks;
- Program Trading and the Use of Derivative
Securities Software. Large institutional investment companies used
computers to execute large stock trades automatically when certain
market conditions prevailed. Some analysts claim that the program
trading of index futures and derivatives securities was also to
blame.
The markets hit a new high on August 25, 1987 when the
Dow hit a record 2722.44 points. Then, the Dow started to head down. On
October 19, 1987, the stock market crashed. The Dow dropped 508 points
or 22.6% in a single trading day. This was a drop of 36.7% from its high
on August 25, 1987.
Following the Crash:
- Uniform Margin Requirements. New margin
requirements were introduced to reduce the volatility for stocks,
index futures, and stock options;
- New Computer Systems. Stock exchanges changed to
new computer systems that increase data management effectiveness,
accuracy, efficiency, and productivity;
- Circuit Breakers. The New York Stock Exchange and
the Chicago Mercantile Exchange instituted a circuit breaker
mechanism, which halts trading on both exchanges for one hour should
the Dow fall more than 250 points in a day, and for two hours,
should it fall more than 400 points.
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