Understanding the 1987 Stock Market Crash: Causes & Impact

In 1987, world stock markets collapsed. The crisis began in Hong Kong and swept across mainland Europe until it hit U.S. shores on Oct. 19. The Dow Jones Industrial Average (DJIA) lost 508 points, or 22 percent of its value, in a single day. The "black swan event," a phenomenon that occurs beyond any reasonable expectation, left the financial sector devastated. To this day, no one knows what really caused it. But like every black swan event, it has been rationalized endlessly in hindsight, and since 1988 the New York Stock Exchange has relied on a fail-safe mechanism to stop the stock market and prevent such declines.

Rule 80B

In the wake of the 1987 event, the presidential Working Group on Financial Matters convened for the first time. The group advises the U.S. president in times of crisis and determines if a presidential shutdown of the NYSE is in order and what the implications of such a shutdown might be. The NYSE itself instituted Rule 80B, establishing critical trigger points that would pause trading in the event of a significant drop. Subsequently, a 350-point drop triggered a market closure of 30 minutes, while a 550-point decline resulted in a 60-minute pause. Only once, in 1997 during the Asian financial crisis, did these circuit breakers trigger a stop in the trading day.

Amended Rule 80B

In 1998, the NYSE amended Rule 80B, as a decade-long bull market made the previous point-value triggers too conservative. The amendments set the first trigger point at 10 percent of the DJIA. It was assigned a point value quarterly, based on the final close of the previous quarter. A 10 percent drop before 2 p.m. results in a market stop of one hour. If the trigger is reached between 2 p.m. and 2:30 p.m., trading halts for 30 minutes, and there is no shutdown if the point is reached after 2:30 p.m. As of 2009's fourth quarter, the 10 percent trigger point equals 950 points.

Twenty Percent Declines

Steeper declines result in longer shutdowns. If a 20 percent decline is reached before 1 p.m., the shutdown lasts for two hours, while trading ceases for one hour if the point is reached between 1 p.m. and 2 p.m. When the market drops by 20 percent after 2 p.m., the market closes for the day. As of 2009's fourth quarter, the 20 percent trigger point equals 1,950 points.

Thirty Percent Declines

Precipitous declines reaching 30 percent of the DJIA, a level that has never been reached, result in a shutdown for the entire trading day, regardless of the time the trigger point is reached. As of 2009's fourth quarter, the 30 percent trigger point equals 2,900 points. In the global financial crisis of 2008, the DJIA saw two one-day declines of over 700 points, but due to the market's lofty heights at the time of the pullback, those drops fell short of even the 10 percent shutdown threshold.