What In The Hell Happened Yesterday On Wall Street?

By Justin Gardner | Related entries in Economy, Money, Stocks, The World, Transparency, Wall Street

Wall Street

Human error? Computer error? Greece? Spain? China?


Wall Street Journal tries to sort out the mess…

A bad day in the financial markets was made worse by an apparent trading glitch, leaving traders and investors nervous and scratching their heads over how a mistake could send the Dow Jones Industrial Average into a 1,000-point tailspin.

At its afternoon low, the Dow had plummeted 998.50 points, its biggest intraday point drop ever. The swing from its intraday high was 1,010.14 points.

The Dow eventually rebounded to close down 347.80 points, or 3.2%, at 10520.32, its worst percentage decline since April 2009. Stocks from Dow components Procter & Gamble and 3M suffered precipitous declines. At one point shares of P&G tumbled 37%.

Okay, but what happened?!?

Traders theorized that an initial trading error triggered a piling-on effect from computerized trading programs designed to sell when the market moves lower. At the same time, pre-set orders form individual traders and investors to sell on declines during market downturns were likely triggered.

The volatile moves in many stocks likely triggered a wave of additional trades as hedges such as limit orders and options strategies kicked in. That could have caused the market to plunge further.

Oh…I see…the market worked exactly how it was supposed to…and nothing stopped it.

Well…we’ve heard all about automated systems trading stock so fast that it’s virtually unstoppable…haven’t we Goldman Sachs?

And to that point…

Accelerating the declines, high-frequency hedge funds, which use computers to trade at super high speed, appeared to pull back from the market as prices collapsed. These hedge funds have grown to account for a significant amount of trading volume, and their absence likely created a void into which prices fell.

Scared yet folks? No? Then you can’t see the forest fire for the falling trees.

But let’s talk about Greece for a moment. The country recently secured some loans from the IMF and the European, but investors aren’t convinced…

It seemed to sneak up on us, the issue of Greece indebtedness. The problem isn’t complicated: the country borrowed way too much and now is struggling mightily to pay back what it owes. Now, its financiers in Germany and elsewhere in Europe are facing massive losses.

The danger had been percolating in Europe for a while. But only this week did it seem to sink in with U.S. investors how closely related Greek’s problems were to our own. Some on this side of the Atlantic believed the rest of Europe would step in and provide a bailout to protect the rest of the continent. Now some believe the package that was announced by the European Union and the International Monetary Fund won’t work or won’t be enough, raising questions about how the European Central Bank has handled the crisis.

And all of this hullabaloo has sent Asian stocks tumbling…

Investors continued to exit riskier assets—with many Asian markets now down heavily for the week—on escalating concerns that Greece’s debt problems could engulf the weaker European countries.

Regional currencies were sharply lower, including the Korean won, which fell to a three-month low against the U.S. dollar of 1,169.50 won. The euro, which plumbed 14-month lows of $1.2510 against the U.S. dollar Thursday, was steadier in Asian trade although analysts expect more pain ahead for the common currency.

Japan’s Nikkei 225 was down 3.8%, after a 3.3% fall Thursday, with Australia’s S&P/ASX 200 down 2.3% at 4468.70, briefly touching a low of 4427.30, South Korea’s Kospi off 3% and New Zealand’s NZX-50 lower by 1.9%. Taiwan’s Taiex index was off 2.4% and in China the Shanghai Composite Index lost 2.2%.

One thing’s for sure…if Wall Street was looking to minimize government intervention and thwart new regulations…the timing of this glitch couldn’t have been worse.

More as it develops…

This entry was posted on Friday, May 7th, 2010 and is filed under Economy, Money, Stocks, The World, Transparency, Wall Street. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

8 Responses to “What In The Hell Happened Yesterday On Wall Street?”

  1. Milo Says:

    Chill out. A short-term zag like this only matters to traders; it has no real importance. 99% of the population shouldn’t be watching these numbers every day – they’ll miss the forest for the trees. (Oh, but Greece IS f-ed, though that’s a rather different problem. But it’s like subprime in some ways – what fool loans money to Greece? You get what you deserve.)

  2. Chris Says:

    On the news they were saying it wasn’t a glitch.

  3. Trescml Says:

    Actually I think the timing is great if you are Wall Street. Any time the stock market tanks, it make people worry about their 401Ks. Congress isn’t going to want to do anything that will cause the stock market to drop further in an election year. That is partially how we got the bailout.

  4. WHQ Says:

    Traders theorized that an initial trading error triggered a piling-on effect from computerized trading programs designed to sell when the market moves lower. At the same time, pre-set orders form individual traders and investors to sell on declines during market downturns were likely triggered.

    This is interesting. I have a 401k-like retirement account through my employer. One of the funds I have is more or less a money-market account that simply earns some (very) small return with virtually no risk. I move money in and out of that fund and out of and into my other stock-based funds when there are occasional large swings in the stock market – in essence, buying and selling stock, low and high, respectively. Yesterday afternoon I moved some of the money that was in the money-market-like fund into the stock-based funds. Basically, I bought. If the market goes down more than 200 points again today, I’ll do the same. Apparently, I’m betting that Wall Street is wrong more often than not. I don’t know if that makes me smart or nuts.

    (captcha: technologically romps)

  5. Nick Benjamin Says:

    It makes you smart. Even when Wall Street is right they over-react. Remember Buffet’s rule: when other people are greedy be fearful, when other people are fearful, be greedy.

    When the market drops 1,000 points in a day, for no apparent reason, somebody’s fearful.

  6. WHQ Says:

    Today’s looking like a day to sell.

  7. medlaw Says:

    Reply to Milo. “Chill out. A short-term zag like this only matters to traders; it has no real importance.” It certainly matters to the people who lost money in the momentary panic. The question is whether the panic was triggered by manipulation. How and why did the supposed error occur? If Citi did trigger the selloff through a trading error, how soon did it discover the error and how quickly did it communicate that info to the public? Why is that important? Because those with knowledge of the “error” before the other traders in the market possessed a competitive advantage in reacting to the selloff. The SEC is investigating this mess. It smells.

  8. Milo Says:

    to medlaw: losing money in that momentary panic was actually hard, if you mean actual *realized* losses. You had to trade at just the wrong time in the wrong direction, and if you are an investor not a trader this probably didn’t happen to you. Agreed that it’s worth investigating in case of manipulation (or in case the NEXT one is!) Regarding the SEC, I really think they are following the noise, not leading the charge – but I do hope they learn something useful.

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