25 Years On: Black Monday remembered

On October 19 1987, 25 years ago today, the City of London was hit by the cataclysmic event known as 'Black Monday'. Just days after the 'Great Storm of 1987', when hurricane-force winds battered the South-East, markets were sent into a tailspin by a stock market crash emanating from the Far East after falling stock prices in the U.S. The causes of the crisis are still the subject of debate, but have variously been put down to the overvaluation of stocks, the herd mentality of investors fleeing from catastrophe, program trading, and the hedging strategy known as portfolio insurance. Financial News asks the veterans to recall their memories of the day and its aftermath.

 

 Peter Randall, Chief executive of Equiduct Systems

“I remember it incredibly clearly, because the day before, I got on the plane with my family from London and we flew back to Hong Kong where I was working. When we landed there was a Chinese language newspaper which said that the New York Stock Exchange was down 500 points.

 I was an associate partner at James Capel attached to the Bernstein James Capel joint venture, and I called the people I was working with in New York. They confirmed everything. I was in the air during the time it was all going on. It was a fairly memorable experience.

 

  The first call I had to make to everyone on the following day was that this was a great buying opportunity. The amount of people who gave me no time at all was incredible, including a very large sovereign wealth fund.

 

  At Bernstein there was a belief that when everyone else wanted to sell was a good time to buy.

It wasn’t my call to be fair - this was a results of Bernstein’s New York analysts, who were fantastically well respected.

 

I was invited to attend a meeting the day or so after that, and I laid out the arguments and they said, 'you’re absolutely right'.

 

The argument was that just because Wall Street panics, it didn’t mean there was anything going on on Main Street."

 

Anthony Fry, Chairman, Espirito Santo Investment Bank

 

   “I can remember it like it was yesterday. The Thursday night was the famous storm. I remember waking early in the morning, and the windows were rattling. Next morning we had no radio. I got to the office early and there were so few people around. Half way through the day I met a lawyer friend of mine and we had a jolly old lunch. It was only later that afternoon that news began to filter through that things were not great in New York – and that’s an understatement. My initial reaction was, 'that doesn’t sound great', because Rothchild’s were amongst the banks advising on the BP sale [the UK government was selling a 30 per cent stake in BP]. We thought it could be a real problem because everyone was on the hook.

 

   I think it took people 24 hours to think that it would reflect on the Monday market. It was only on the Saturday during calls with colleagues that realities finally began to dawn.

It’s impossible to know what would have happened had the London market been open on that Friday [ the storm prevented many in the City from getting to work]. It’s a debating point – by the Sunday, people were already thinking through the implications and had critical breathing space. I wonder whether or not the 24 hours of thought equipped people much better.

 

    It sort of ended in a historically good position for the bank. I think the bank became much more risk-averse, and that made a huge difference when it came to the collapse of Barings. It’s not that there was major policy change, I just think everyone looked at everything twice. With hindsight that caution protected the bank. "

 

Hugh Cumberland, business development manager, consulting and solutions at Colt Enterprise Services

 

   "I was on holiday in Malta when the hurricane struck, so was enjoying clear blue skies and 25C whilst most others were being battered and blown around. I went into Baring Securities Monday morning, and everything was back to normal - but we heard an insurance broker had been trapped in one of the glass lifts for over 12 hours. I remember the chaos in the dealing room, the screens were a sea of red. The noise fluctuated between thunder and near silence. We had some SEAQ screens, but made markets in so few UK or European stocks it really didn't affect us that badly. Our head of equity sales told me that the top UK market makers just weren't picking up - 'trading today is like trying to catch a falling knife'.

 

  Rumour in the City was that Baring Securities was the only trading house in London to make money that day.

 

   The crash was caused by a sentimental sell off. The chaos of the hurricane plus poor economic news.

 

    I don't think we had the protections like circuit breakers in place then. The market was a lot thinner. And remember it was only a year after the Big Bang. Most houses were still finding their feet, and installing new systems.

 

   We are much better equipped to handle this situation now. The IT infrastructure is much more robust. The market is deeper and broader and better equipped to absorb shocks.

Black Monday is a reference point that shaped IT planning and design for the next two decades but as memories fade we need to be watchful that we don't become complacent.“

   Brian Winterflood, Life president, Winterflood Securities. Working at the time at ‘jobbing’ firm Bisgood Bishop, part of County Natwest

“I remember leaving home after the dreadful storm. I remember driving through north Clapton, and some trees were down.

 

   Having got into City, it was total disbelief. Phones never stopped ringing and people were calling from foreign radio stations including Radio Monaco, all hoping for the view from London. We were still trading amazingly, we had all these pages of bought bargains and fortunately there were still buyers around. Of course that didn’t last forever as things became more and more difficult, but we actually avoided stopping the trading – and I’m not sure we actually closed on the day. We managed to keep both sides of the market open.

 

With the combination of the two – the collapse of the markets and the storm – it was like Armageddon. It was just totally unreal.

Markets do correct themselves quickly, but there were a massive amount of small sellers on Black Monday. We managed to sell them to someone. You take it in your stride and get through the day and look forward to the next one, but we never had to reassess our position (as a result of Black Monday). "

David Casterton, chief executive officer of global broking at Icap

 

   “At the time I was working for Butler Harlow, which later became Garban and subsequently ICAP. At that time I would have been one of the senior people running interest rate derivates swaps and options.

 

   I can certainly remember the event. At the time, the excitement for those in London began with the hurricane on Friday, in fact in many ways the hurricane itself was probably more memorable. Having heard the gales during the that night, like most in the City you come to work come what may and all of my office at the time battled their way in. In a way (the hurricane) contributed to the impact of Monday with the markets practically being closed through Friday.

 

   Clearly we weren’t in an era when electronic information was readily available, so there was probably less general panic but equally there was less certainty. All we could see was what was going on at the Reuters screens – I don’t even think we had a Bloomberg machine in those days.

 

   As a rates derivatives broker I can’t honestly remember what happened with equity trading volumes, although I am sure it was extremely frantic, as far as I can remember, it soon went back to business as usual for the markets I was in. Obviously the equity markets were fundamentally in a different place.

 

   With the benefit of 25 years of hindsight, the comparison I would make would be to the Lehman event, perhaps because it’s fresher in my mind. But I see 1987 as far less catastrophic than 2008, when it really did feel like we were teetering on the edge of the abyss. It didn’t feel like the world was melting in 1987. Maybe it was because I was younger then and feeling a bit more bullet-proof, but it didn’t have the same fear factor.”

 

   Stuart Fraser, deputy policy chairman at the City of London. Fraser was working as a partner at investment manager Williams de Broë

 

   “I remember coming out of my house to find all the trees down on the Monday. It was horrific because we all knew what was going to happen. In those days we had the jobbers on the trading room floor - I remember trying to close a bear position and it took two hours to close the trade.

It's difficult to say what precipitated it. I was very bearish, but not expecting that to happen - I was expecting a decent sized correction. That's what it would have been if not for program trading, which turned it into something similar to the flash crash (in 2010). Afterwards they introduced circuit breakers, but it was the first technically driven crash. It's ironic that it was repeated years later.

Of course the market the regained its positions two years later - it was exciting but not what we call a long term thing. What made it interesting was the storm on the Friday. Of course, there were lessons but the problems with the current crisis is that technology runs far ahead of regulators...this is a problem."

 

   City veteran and markets commnetator David Buik, who at the time was setting up an embryonic money broker – Money Markey Agencies – in response to the challenges of Big Bang,

"The quality of technology at the time was very basic and certainly was inadequate to respond to a really negative sentiment, which started to prevail across global bourses. Also there wasn’t the intensity of information from the newswires. Yes, Reuters was dominant and Telerate and Knight Ridder were there, as was the Press Association and AP, but there was no Bloomberg to increase the intensity of competition to supply top class accurate data and news.

 

   Newspapers and television certainly played a role with its commentary on business news and opinions, but were nothing like as influential as the media is today. Consequently you can imagine the clammy and chilling feeling of fear that permeated through every dealing room in London.

At the time, the market makers were only just under a wet sail in replacing the stockbroker/stock jobber culture. Many US and European banks came to London to participate in what became the world’s most competitive market place. Such fashionable names as Salomon Brothers, Goldman Sachs, Lehman Brothers, Deutsche Bank, JP Morgan Chase, Bankers’ Trust, Societe Generale and ABN Amro came to pit their wits against the domestic incumbents such as Barclays Bank and Midland Bank, which eventually was swallowed up by HSBC. Had Big Bang not been underway coupled with an unrecognisable improvement in IT -- though its quality may still have been inadequate as was the lack of aggregate hedging on market-makers books -- I suspect that the damage to share valuations may have been much worse.

 

   Spread betting also suffered with Stuart Wheeler’s IG Index and Johnny Spark’s City Index forced to look for fresh capital in double quick time. This was not due to their management short comings. Such was the ferociousness of the collapse many of their clients were unable to settle their bills immediately!

 

   There were salutary lessons learned, but the world continues to suffer from amnesia and then came 2008 – the credit crisis resulting virtually in financial meltdown!"