Which 1987 market-crash mechanism used automatic sell orders to hedge portfolios?

The 1987 market-crash mechanism that used automatic sell orders to hedge portfolios was portfolio insurance.

Portfolio insurance was a computerized risk-management strategy based largely on dynamic hedging. As stock prices fell, the strategy called for selling stock-index futures or related assets to reduce exposure. The approach was intended to limit losses without requiring investors to sell everything at once.

During the October 1987 turmoil, many investors and institutions followed similar rules at the same time. Falling prices generated more sell signals, which could increase downward pressure and weaken market liquidity. Researchers and regulators concluded that these feedback effects contributed to the crash, although they were not the only cause.

Portfolio insurance did not literally guarantee that a portfolio would retain its value. The strategy depended on liquid markets and orderly execution, conditions that became unreliable during the panic. The episode helped drive reforms in trading, including circuit breakers designed to pause markets during unusually rapid declines.