Portfolio insurance was the 1987 market-crash mechanism that automatically sold financial futures as prices fell, intensifying the decline.
Portfolio insurance was designed to limit losses in equity portfolios. It used computer-based trading rules to sell stock-index futures when markets declined, creating a hedge that was expected to protect investors during a downturn. In a rapid, one-directional fall, however, many similar strategies could issue sell orders at the same time.
During Black Monday on October 19, 1987, this feedback process was widely viewed as one factor that amplified selling. It was not a complete explanation: economic uncertainty, valuation concerns, interest-rate movements, trade tensions, and market structure also mattered. The episode led regulators and exchanges to examine computerized trading and market liquidity. Circuit breakers were later introduced to pause trading after unusually large moves. Portfolio insurance should not be confused with ordinary insurance provided by the Federal Deposit Insurance Corporation, which protects eligible bank deposits rather than stock portfolios.