Why markets crash

What could tip the market over? Well, let me ask you this: what caused the 1987 crash?

- MARCUS PADLEY

Don't know? No, you don't know, because there wasn't one specific reason for the 1987 crash. When the dam cracks, you don't go looking at the first drop that came through the first crack and analyse it, it serves no purpose, because the reason the dam cracked was that before the 1987 crash, the All Ordinaries Index went up from 1094 to 2306 in 14 months. It went up 110%. That was an average annual return every month for more than a year.

So what cracked the equity markets and caused the crash in October 1987 was not a specific event, it was a buildup of pressure over a long period of time. That's what eventually broke the market, and in London it happened like this.

In 1987 we were sitting in the dealing room of a UK stockbroker and one young guy started writing red tickets. Literally, writing out tickets on a red dealing pad, one ticket after another. Red was a sell. Blue was a buy. We all had two pads. The blue dealing pad sat idle.

Doing a few tickets in those days was meaningful because the commissions started at 1.6%, and they went up if the order was larger. So it was noticeable. This young dealer was ripping off red ticket after red ticket. One after another, after another.

The orders were coming in on a direct line from one international fund manager and the moment he hung up a call, it flashed again. Red ticket after red ticket after red ticket. One after another after another.