How did the 'Black Monday' stock market crash of 1987 occur, and what role, if any, did computer trading play?

Okay, let's talk about the famous "Black Monday" of 1987. This was indeed a major event in financial history, and it had a very significant connection to computers.

Black Monday '87: Was It the Computer's Fault?

Imagine the U.S. in the 1980s: the economy was booming, and the stock market was soaring like a rocket. Everyone thought tomorrow would be even better, and buying stocks was a sure path to wealth. From 1985 to 1987, the Dow Jones Industrial Average more than doubled. The market was in a frenzy, but danger was quietly brewing beneath the surface.

"Minor Hiccups" Before the Storm

Even before "Black Monday" on October 19th, the market was already showing signs of trouble.

Bad News Piling Up: At the time, the U.S. announced very disappointing trade deficit figures, the dollar began to depreciate, and the government planned to raise interest rates to stabilize the dollar. Interest rate hikes are never good news for the stock market, as they increase the cost of borrowing to invest.
Last Friday's Preview: The Friday before Black Monday (October 16th) had already seen a significant market decline. This made many investors uneasy, and market panic began to spread.

These factors were like adding fuel to an already overheated boiler, making market sentiment extremely fragile.

The Key Player Emerges: Program Trading

Now, let's discuss the core of this event, which is what you asked about: computerized trading. At that time, Wall Street was abuzz with a very fashionable concept called "Program Trading," and one of its most prominent strategies was "Portfolio Insurance."

It sounds sophisticated, but simply put, it was an automated risk-hedging program.

What was its logic? You can think of it as an "autopilot" trading system. Large fund companies managing tens or hundreds of billions of dollars would set up a program on their computers to prevent their stock portfolios from losing money:

"If the market falls by X%, automatically sell stock index futures immediately to hedge the risk of my stock holdings."
Sounds perfect, doesn't it? Individually, this strategy was indeed clever; it could help lock in profits and reduce losses. But the problem arose when everyone thought this was a great idea and started using the same "smart" strategy. That's when disaster struck.

The Domino Effect of the Crash

Alright, the stage was set, the actors were in place, and the big show officially began on Monday, October 19, 1987.

Opening Bell Decline: Due to the panic from the previous Friday and bad news accumulated over the weekend, the market opened significantly lower on Monday.
First Wave of Programmed Selling Triggered: As soon as the market dropped, it immediately triggered the "portfolio insurance" programs of the first batch of fund companies. Computers began to relentlessly and frantically dump stock index futures onto the market.
Accelerated Decline, Triggering More Programs: The initial wave of selling caused the market to fall even more sharply. This, in turn, triggered the "automatic sell" programs of even more companies, as their predefined decline thresholds were also met.
Vicious Cycle: Thus, a terrifying vicious cycle began:

Market falls → Computers automatically sell → Market falls even harder → More computers join the selling spree → Market crashes

This was like being in a crowded movie theater where one person shouts "Fire!", and everyone rushes towards the same narrow exit, resulting in a stampede where no one can get out.

At the time, traders watched in disbelief as prices plummeted on their screens. The speed of the decline was so rapid that even the quoting systems couldn't keep up. Human panic combined with the "ruthless" execution of computers jointly created this stampede. In a single day, the Dow Jones Industrial Average plunged by 22.6%, marking the largest single-day percentage drop in history.

So, Should Computers Take the Blame?

This is a very interesting question.

Yes, and no.

Saying "yes" is because without computers, synchronized selling of this scale and speed would have been absolutely impossible. No matter how fast human traders were, they couldn't have reached a consensus and collectively crashed the market in a matter of minutes. Computers accelerated and amplified this process countless times; they were the "foot" on the accelerator.

Saying "no" is because computers themselves have no consciousness; they merely faithfully execute the instructions given to them by humans. The real problem lay in the "portfolio insurance" strategy itself. Those who designed this strategy only considered how to extricate themselves, without considering what would happen if everyone tried to extricate themselves using the same strategy simultaneously.

Therefore, more accurately, "Black Monday" was a disaster born from the combination of human greed, panic, and emerging technology (program trading). It taught Wall Street a profound lesson: even the most advanced tools, if their underlying logic is flawed, can become destructive weapons.