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# U.S.

2026-07-30·x-repost-20260730-164531

U.S. Stocks in 1987: Who Pulled the Trigger on the Crash? ## The Trading Day Before the Crash From August to mid-October, the Dow had already fallen about 18%. In fact, the correction two years earlier had been around 25%, so the market generally expected that this time, at worst, the decline would just grind lower for a few more months.

But the key moment came on October 16, a Friday. That was the trading day before the October 19 crash, and the market posted a sharp -4.6% drop. Looking back, that red candle was essentially the trigger for the crash. ## The President Formed a Task Force After the “Black Monday” crash, the U.S.

president immediately formed a task force, led by then Treasury Secretary Nicholas Brady. The following year, in 1988, it issued an official investigative report.

That report, known as the Brady Report, was the first to systematically analyze the causes of this single-day market crash: the chain reaction of stock, futures, and bond markets set off by program trading, which ultimately triggered a cascading collapse.

In 1987, major Wall Street investment banks and fund firms were already widely using computer trading, and complex mathematical models and trading strategy combinations had already been developed and deployed.

These computer programs could monitor the market in real time and automatically or semi-automatically generate baskets of stock buy and sell orders according to strategy rules. But at the time, a large portion of order entry and execution still had to be handled manually by traders, and the New York Stock Exchange still used an open-outcry system.

Because many Wall Street investment strategies were based on modern portfolio theory and monitored risk and return in real time, many institutions were using very similar approaches: To put it in plain English: once a program saw stock prices falling, the investment strategy would show higher risk, and the rule would be to reduce risk exposure by selling stocks and cutting positions.

## Crowded Strategies, Congested Stocks As mentioned above, Wall Street institutions’ strategies and risk controls were broadly similar. Once a stock’s decline exceeded a risk threshold, it would inevitably trigger a large volume of program-driven sell orders. Those orders would then be routed by traders and wait to be executed.

In hindsight, the sharp -4.6% drop on October 16 had already caused many program trading systems to build up large sell orders, all waiting to be submitted at the opening on October 19. When these huge numbers of electronic orders hit the exchange, problems quickly emerged.

At the time, the exchange floor was still run by red-jacketed specialists using open-outcry seats, and its processing capacity was extremely limited, which led to severe order congestion, delays, and failures to execute. While those sell orders were waiting to be filled, the stock price had already been pushed lower again by the orders that did get executed.

That price feedback went back to the institutions’ trading programs and traders, who then had to cancel orders, lower their sell prices, and send the orders back out again.

At the same time, Wall Street fund managers were unable to meet immediately and make new investment decisions, so program trading more or less entered a state of “running automatically with no one at the controls” for several hours. For the market as a whole, the result was first price panic, then a drying up of liquidity.

Prices stopped functioning normally, and where there was no liquidity to trade at a given level, the market was forced to jump straight to lower levels. Stocks fell in a straight line until the entire market collapsed.

It was this crash that directly pushed exchanges around the world, including the NYSE and the Hong Kong Stock Exchange, to carry out a complete electronic overhaul, paving the way for the truly high-speed, fully automated electronic trading systems that followed.

In the 1990s, China’s Shanghai and Shenzhen stock exchanges also got started on the basis of this efficient, fully automated electronic trading system. Beyond the stock market, program-trading-based index arbitrage strategies and portfolio insurance strategies also created cross-market linkages.

When stocks fell and liquidity was too thin to sell, fund institutions could only add short positions in index futures contracts. As futures prices fell too fast and diverged from the cash index, arbitrageurs entered the market by buying futures contracts while also shorting and selling more cash equities to lock in the arbitrage spread.

That, in turn, added even more stock sell orders out of nowhere, creating a vicious “waterfall effect.” ## Circuit Breakers: One Thing in One Place, Another in Another At the end of the Brady Report, the following recommendations were proposed to prevent a repeat of the crisis: 1️⃣ Introduce circuit breakers—not just for indexes, but for individual stocks as well.

Set three tiers at 7%, 13%, and 20%, with a certain time buffer in between, so that human intervention is possible to adjust algorithmic trading and break the chain reaction at critical moments.

One more point here: A-shares also introduced a circuit breaker mechanism, but in practice they have always had another price gate at the same time: daily price limits. In A-shares in 2016, the circuit-breaker thresholds were set too close together (5% and 7%).

But because price limits were also in place, once prices got close to 7%, sellers became even more desperate to avoid hitting the limit-down restriction and sold more aggressively, pushing the market price even closer to the ultimate target price: the limit-down price.

That is why the mechanism was triggered four times in just four days in 2016 and was urgently suspended. This tells us that in a market, it is best not to have two internally contradictory trading mechanisms.

2️⃣ Establish a single cross-market coordinating body, unify settlement and margin requirements, and require all levels of clearing institutions to settle without deficits every day, so as to avoid excessive leverage at clearing institutions. ## Did the Brady Report reverse cause and effect?

Some people also believe that the Brady Report reversed cause and effect, and that the root cause of the crash was the macroeconomic imbalance and market bubble at the time.

But we believe: macroeconomic imbalances and market bubbles were, of course, the fundamental reasons for the market decline, but they were not the reason for a single-day plunge of 22.6%.

Six days after the crash, the Dow had already returned to normal volatility, rebounding from around 1,600 at the low to around 2,000, and the maximum drawdown recovered from 40% to about 26%.

In other words, this correction, if it had played out normally, should have been more like the roughly 25% adjustment that took about a year, similar to what happened from mid-1983 to mid-1984.

But because of the use of program trading and crowded strategies, what should have been a gradual 25% decline over the course of a year turned into a 22.6% single-day drop and a 26% drop over six days. With everything forced into one step, many long positions were liquidated at around -40%, causing severe damage to the entire market.

So, for long-term investors, in addition to fundamentals, market trading rules and the structure of market funding are also something they must always keep in mind.

Full text

# U.S.

# U.S. Stocks in 1987: Who Pulled the Trigger on the Crash? ## The Trading Day Before the Crash From August to mid-October, the Dow had already fallen about 18%. In fact, the correction two years earlier had been around 25%, so the market generally expected that this time, at worst, the decline would just grind lower for a few more months. But the key moment came on October 16, a Friday. That was the trading day before the October 19 crash, and the market posted a sharp -4.6% drop. Looking back, that red candle was essentially the trigger for the crash. ## The President Formed a Task Force After the “Black Monday” crash, the U.S. president immediately formed a task force, led by then Treasury Secretary Nicholas Brady. The following year, in 1988, it issued an official investigative report. That report, known as the Brady Report, was the first to systematically analyze the causes of this single-day market crash: the chain reaction of stock, futures, and bond markets set off by program trading, which ultimately triggered a cascading collapse. In 1987, major Wall Street investment banks and fund firms were already widely using computer trading, and complex mathematical models and trading strategy combinations had already been developed and deployed. These computer programs could monitor the market in real time and automatically or semi-automatically generate baskets of stock buy and sell orders according to strategy rules. But at the time, a large portion of order entry and execution still had to be handled manually by traders, and the New York Stock Exchange still used an open-outcry system. Because many Wall Street investment strategies were based on modern portfolio theory and monitored risk and return in real time, many institutions were using very similar approaches: To put it in plain English: once a program saw stock prices falling, the investment strategy would show higher risk, and the rule would be to reduce risk exposure by selling stocks and cutting positions. ## Crowded Strategies, Congested Stocks As mentioned above, Wall Street institutions’ strategies and risk controls were broadly similar. Once a stock’s decline exceeded a risk threshold, it would inevitably trigger a large volume of program-driven sell orders. Those orders would then be routed by traders and wait to be executed. In hindsight, the sharp -4.6% drop on October 16 had already caused many program trading systems to build up large sell orders, all waiting to be submitted at the opening on October 19. When these huge numbers of electronic orders hit the exchange, problems quickly emerged. At the time, the exchange floor was still run by red-jacketed specialists using open-outcry seats, and its processing capacity was extremely limited, which led to severe order congestion, delays, and failures to execute. While those sell orders were waiting to be filled, the stock price had already been pushed lower again by the orders that did get executed. That price feedback went back to the institutions’ trading programs and traders, who then had to cancel orders, lower their sell prices, and send the orders back out again. At the same time, Wall Street fund managers were unable to meet immediately and make new investment decisions, so program trading more or less entered a state of “running automatically with no one at the controls” for several hours. For the market as a whole, the result was first price panic, then a drying up of liquidity. Prices stopped functioning normally, and where there was no liquidity to trade at a given level, the market was forced to jump straight to lower levels. Stocks fell in a straight line until the entire market collapsed. It was this crash that directly pushed exchanges around the world, including the NYSE and the Hong Kong Stock Exchange, to carry out a complete electronic overhaul, paving the way for the truly high-speed, fully automated electronic trading systems that followed. In the 1990s, China’s Shanghai and Shenzhen stock exchanges also got started on the basis of this efficient, fully automated electronic trading system. Beyond the stock market, program-trading-based index arbitrage strategies and portfolio insurance strategies also created cross-market linkages. When stocks fell and liquidity was too thin to sell, fund institutions could only add short positions in index futures contracts. As futures prices fell too fast and diverged from the cash index, arbitrageurs entered the market by buying futures contracts while also shorting and selling more cash equities to lock in the arbitrage spread. That, in turn, added even more stock sell orders out of nowhere, creating a vicious “waterfall effect.” ## Circuit Breakers: One Thing in One Place, Another in Another At the end of the Brady Report, the following recommendations were proposed to prevent a repeat of the crisis: 1️⃣ Introduce circuit breakers—not just for indexes, but for individual stocks as well. Set three tiers at 7%, 13%, and 20%, with a certain time buffer in between, so that human intervention is possible to adjust algorithmic trading and break the chain reaction at critical moments. One more point here: A-shares also introduced a circuit breaker mechanism, but in practice they have always had another price gate at the same time: daily price limits. In A-shares in 2016, the circuit-breaker thresholds were set too close together (5% and 7%). But because price limits were also in place, once prices got close to 7%, sellers became even more desperate to avoid hitting the limit-down restriction and sold more aggressively, pushing the market price even closer to the ultimate target price: the limit-down price. That is why the mechanism was triggered four times in just four days in 2016 and was urgently suspended. This tells us that in a market, it is best not to have two internally contradictory trading mechanisms. 2️⃣ Establish a single cross-market coordinating body, unify settlement and margin requirements, and require all levels of clearing institutions to settle without deficits every day, so as to avoid excessive leverage at clearing institutions. ## Did the Brady Report reverse cause and effect? Some people also believe that the Brady Report reversed cause and effect, and that the root cause of the crash was the macroeconomic imbalance and market bubble at the time. But we believe: macroeconomic imbalances and market bubbles were, of course, the fundamental reasons for the market decline, but they were not the reason for a single-day plunge of 22.6%. Six days after the crash, the Dow had already returned to normal volatility, rebounding from around 1,600 at the low to around 2,000, and the maximum drawdown recovered from 40% to about 26%. In other words, this correction, if it had played out normally, should have been more like the roughly 25% adjustment that took about a year, similar to what happened from mid-1983 to mid-1984. But because of the use of program trading and crowded strategies, what should have been a gradual 25% decline over the course of a year turned into a 22.6% single-day drop and a 26% drop over six days. With everything forced into one step, many long positions were liquidated at around -40%, causing severe damage to the entire market. So, for long-term investors, in addition to fundamentals, market trading rules and the structure of market funding are also something they must always keep in mind.

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