Portfolio insurance was the automated selling strategy widely blamed for intensifying the 1987 stock-market crash.
Portfolio insurance used computer models to reduce exposure to falling markets, commonly by selling stock-index futures as prices declined. The strategy was designed to limit losses in a portfolio, but many investors and institutions could receive similar sell signals at the same time. That created the possibility of a feedback loop: falling prices prompted more futures selling, which put additional pressure on stocks.
On October 19, 1987, the Dow Jones Industrial Average dropped 22.6%, its largest one-day percentage decline. Portfolio insurance was not the sole cause. Other contributing factors included elevated valuations, market uncertainty, computerized trading, and imbalances between cash equities and futures markets.
The episode helped change market structure and risk controls. US exchanges later introduced circuit breakers to pause trading during extreme moves. Portfolio insurance itself was not simply banned, but the crash encouraged regulators and market participants to examine how automated strategies could amplify a shock rather than merely manage it.