It is 20 years this month since the biggest one-day stock market crash in history. October 19, 1987, or Black Monday as it became known, was a day few in the financial markets will ever forget. The Dow Jones industrial average plummeted 22.6 per cent in one day, wiping out almost a decade's worth of gains or in real terms US$500 billion.

To put that into context, the stock market crash that presaged the Great Depression in 1929 saw the Dow Jones industrial average fall by 12.8 per cent in the first day of selling. October 1987 was a seminal moment in the history of stock markets and many at the time felt it heralded the start of yet another great depression.

In the United Kingdom, where the market collapse hit first, the FTSE 100 index of leading stocks fell by a staggering 26.4 per cent in one day.

Feverish selling spread across the world and by the end of October stock markets in Hong Kong had fallen 45.8 per cent, and here in Australia markets had plummeted by 41.8 per cent.

It is easy to sit here in 2007, as we soak up our own relatively modest recent stock market correction, to put the events of October 19, 1987, into some kind of historical context. We might see it as just a blip on the radar, a mere correction, which if viewed from afar made no fundamental difference to longer-term post-war share market growth.

To do that, however, would be a mistake. To get any real idea of what 1987 meant to the industry, we need to look through the eyes of those who were there at the time.

For many it was the end of their world. Some of the lucky city traders only lost their jobs, but others saw their lives evaporate overnight in a sea of pink sell-slips.

Investor Weekly spoke to a series of Black Monday survivors and hand-picked just a few of the more vivid accounts of that day. We did not have enough space to publish all the accounts of that fateful day in mid-October 1987, but we hope you agree that what follows brings to life some of the drama of that day.

In the words of one Black Monday survivor from Wall Street: "A recession is a period in which you tighten your belt; a depression a period in which you have no belt; and, when you have no pants to hold up, it's a panic. But Black Monday knocked even our socks off." LONDON
Name: Paul Weighell
Location in October 1987: The City of London
Company: Shaw and Company stockbrokers
Job: IT consultant
Car at the time: Renault saloon
Favourite '80s band: Art of Noise

"We all expected trouble"

There had been heavy storms for some days before Black Monday. Trees were down all over the place, trains cancelled and roads blocked into the city. Dealers were unable to make it to work.

A power cut on the previous Friday had seen us fetching old World War II hurricane lamps from the basement storeroom and putting them around the offices. There was a wartime mood of stolid defiance among those who had made it in on the Monday. We all expected trouble and the weekend press had been covered with stories about bad storms and bad markets.

Markets opened up, and then just fell straight down. By mid-morning some brokers looked white-faced and deep in thought and many were plainly scared. Trying to do their job while the world economy, and their own personal economy, was plunging about their ears was not easy.

To say volumes were large is an understatement. Clients were dumping stock as fast as they could get through on the phone. Everyone was trading back then. Even the back-office staff were punting. Some of them had been around for so long they could deal in the market without needing a licence, but today they were worried. The back-office manager would keep coming into the main dealing room to see what was happening and then scurrying back to the settlement office, presumably to phone his own clients.

Lunch: a very bad situation

At lunchtime I realised that it was a very bad situation. I went around to my bank in Threadneedle Street and withdrew all but a fraction of my money in cash. I really thought the world of safe banking might end that day. I remembered photos of long banking queues in 1929 so I wanted to get in first. I remember the bank being very quiet as if it had no idea of the turmoil in the real world. This was long before the days when every bank had a screen. I almost ran back to the firm with this great roll of cash secured by about four rubber bands bulging in my inner suit pocket dreading what I might find when I got back.

The streets were full of people all hurrying directly from A to B with their heads down. By October 1987 a few of the city pubs had had monitors installed and some showed outside so one could occasionally see the red screens as one passed. Small groups of people watched in silence and I think it was drizzling rain just to complete the doom-laden scenario. The pub just north of London Bridge had a large turning sign outside that swung from bull to bear depending on the FTSE100 index and it was jammed hard round to bear.

The phones rang all day. The handset was replaced after a call and the moment the switch contact was made it just rang again. I don't remember anyone who actually left the firm for a lunch, nor do I remember seeing any food that day at all. The pile of paper trade orders on the dealing desk got larger and larger and they were all pink ones, that is, sell.

Occasionally a stock would show green on the SEAQ (Stock Exchange Automated Quotation) screen as it made it back to the open price of the day but then it would blink and fall red again.

There was breathing space before Wall Street opened as some may have held off wondering if that would open upwards and stem the flood. It didn't. When Wall Street opened down the flood of the morning turned into a sea and everyone knew we were facing meltdown.
We had no idea what form meltdown might take except it was new territory. After 1929 had come the long depression and even World War II could be blamed on the dreadful world economic position that caused.

In 1987 we still had a cold war and the worst parallels took one's mind directly to that. It really was that sort of a day. We literally had our faces pressed to the screens and were watching in awed fascination as the years and years of good times haemorrhaged away. Fast market

At one point the SEAQ system status code turned a bright purple and no-one knew what that meant. A few of us stared at it and after a while it was replaced by the text 'Fast Market', which had not appeared before. I looked up the SEAQ code list but it made no mention of purple or 'Fast Market'. It turned out that it meant the suspension of the legal liability to deal at the prices shown. This was because the market makers were marking prices down faster than the central stock exchange system could update the screens.

Delayed tickers just about defined the 1987 crash and it turned out that the New York ticker had got maybe 22 minutes behind the order flow. As the delay between order and price got larger and larger the hedging models, as we would call them today, went into positive feedback mode, selling more and more into a falling market so, of course, it duly fell more and more.

By the time a client managed to get through on the phone the price would have moved significantly, and then by the time the dealer had got through to the market maker the price would have dropped again. The dealing room had no windows and being in the lower basement level it had really assumed the air of a wartime control bunker under siege.

Did our firm hang up the phones? I think a few chaps did. They just needed a break from the mayhem. All day the market kept falling and people, even quite old hands, were slumped in their seats exhausted and just unable to function with any sort of speed. A sort of doomed, poleaxed feeling descended.

The phones were full of clients selling and the systems could not handle the extra traffic of the inter-office communications. Runners for the brokers on the fourth floor would pelt up and down the 10 sets of stairs to the dealing room to see if deals had been done and at what price they had been filled. The prices just kept on falling faster than anyone could keep up with.

At one point dealers had run out of dealing pads. The backup telex ticker machine ran out of paper as did the fax. It felt a bit like one was bailing out a sinking boat just running about trying to repel new leaks springing up.

By about 3:30pm my adrenaline was over flowing and I dumped my cash bundle onto a dealer's desk and asked him to buy me something - anything.

After the traded option market had closed, or been put out of its misery perhaps, one of our option dealers came back from the floor, fell into a chair and burst out crying. He had always had his own local position as well as dealing for the firm and he had lost it all. A few months later he was jobless, lost his new flat and girlfriend and had a county court judgment against him for debt. The 1980s had ended by the close of markets on Monday.

The aftermath

It later became quite common around the city to see black bags on the streets as dealers were laid off at lunchtime and their desk cleared into black bags left outside the doors. The volumes had shrunk and shrunk and the boom was well and truly over. The streets became quieter than I had ever known. Shaw and Company shrunk its staff, closed outlying offices, sacked its option dealers, pulled in its horns and eventually the partners sold the firm to a bank.

Even today, some 20 years later, the city still seems quieter and more sombre than it was back then. Although a new generation of people is running it that don't remember 1987 and is making all the same mistakes we did.

Until the crash all my clients had been equity stockbrokers or market makers and their market had crashed simply because every punter, encouraged by governments, had tried to go long over the same few years. An unsustainable Tower of Babel had been built whose destruction was inbuilt at its start. SYDNEY
Name: Brian Thomas
Location in October 1987: Sydney, Australia
Company: Capita
Job: Superannuation consultant
Car at the time: Pooh brown, company issue Mitsubishi Magna
Favourite '80s band: Midnight Oil, closely followed by Crowded House

Life seemed pretty damn good in the first half of 1987.

The super industry had a great kick-start with the productivity award of 1986, where 3 per cent of certain award salaries were to be put into super for the first time. I was working as Capita's superannuation consultant involved with corporate superannuation and wholesale investment sales. We won the contract earlier in the year to set up one of Australia's first industry funds, Club Plus, for the club and liquor industry. It was the year of the entrepreneur and of capital guaranteed investments, with life companies offering high double-digit returns with yearly guarantees buoyed by the high reserves built up in the bull market.

To this day I remember clearly the frenzied phone call from the futures pit on the morning of Black Tuesday [by the time the crisis had spread to Australia it was Tuesday] from a friend telling me to "get everything out of the market" while they were being physically pushed over in the rush of the floor traders trying to execute sell orders.

And it kept falling and falling. After the 23 per cent fall in the Dow Jones that morning, Sydney time, the All Ordinaries fell a whopping 25 per cent in one day's trading.

The reality of it hit home that afternoon at the Brooklyn Hotel in George Street. I was having a drink with a bunch of industry guys, including some local floor traders from the SFE (Sydney Futures Exchange), three of whom were personally bankrupted by one day's trading.

Interestingly, the market fall was a big contributor to bringing my employer down, with Capita eventually being acquired by MLC.

I guess one of the fascinating things in the aftermath is that no-one is clear on what caused the crash - certainly a correction was called for but such a big fall on one day was totally shocking. Many blamed the severity on portfolio insurance with huge swags on sell orders being triggered.
 
Crash impact

The highly-geared entrepreneurial stocks were hit hard and more so as we entered the recession we had to have over the next few years.

Life companies realised selling capital guaranteed products in a falling market with their reserves being depleted didn't make a lot of sense. Investment product providers learnt that weekly unit pricing and historical pricing didn't make much sense. 

The rest of it is history. BT's historical call to short the market built its business very quickly in Australia. What caused the crash?

The truth is nobody really knows what caused the panic selling of October 19, 1987. You can speak to five different investment professionals who were there at the time and get five different answers. No particular significant news or events presaged the unprecedented drop in the share market. The only indicator was several days of volatility in the run up to Black Monday.

Some blame it on the mathematical trading models that were preset to sell after the market fell below a certain price. This meant the models blindly sold into a falling market, driving down stock prices yet further. This explanation, however, cannot account for why people began to sell in the first place, it only exacerbated the problem. Other explanations border on the ridiculous. Some blamed lunar cycles for the crash, while others laid the blame on the great storm that hit the United Kingdom in October 1987 that prevented brokers from getting to work.

One of the more sensible explanations involves soaring bond yields and shows startling similarities to today. In 1987, average bond yields went from 7.3 per cent to 10.2 per cent in nine months, driven by fears of inflation, the falling US dollar and rising oil prices. Such attractive yields meant few money managers needed much convincing before they dumped their equities exposures and moved into bonds.

Another widespread theory blamed the crash on a monetary policy dispute between the G-7 industrialised nations, in which the United States, wanting to prop up the dollar and restrict inflation, tightened policy faster than the Europeans. The crash, according to this view, was caused when the dollar-backed Hong Kong stock exchange collapsed, and this caused a crisis in confidence.

The debate as to what triggered the events of October 1987 will continue to rage in perpetuity. All we do know for certain is that no one explanation can account for the unprecedented drop in world share markets.

In his paper on the causes of the 1987 crash, John Paul Koning, a stock market researcher at brokerage Pollitt and Co in Canada, offers perhaps the best summary of events:

"The crash stands like a black hole in 20th century history; unexplainable, fearsome, extraordinary. It smacks humanity in the face, forever reminding us of our failure to explain the very system in which we live."