Fat Fingers Dance On The Keyboard And We All Take The Plunge

Tom Lauricella and Peter McKay at WSJ:

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 1000-point tailspin.

At its afternoon low, the Dow Jones Industrial Average had plummeted 998.50 points, its biggest intraday point drop ever. The swing from its intraday high was 1010.14 points.

The markets were already on edge before the midafternoon collapse as traders watched televised scenes of rioting in Athens following the Greek government’s approval of its portion of the European Union and International Monetary Fund bailout.

Throughout the day, markets around the globe posted big declines as investors reacted with disappointment to the failure of the European Central Bank to signal any heightened concern about the spiraling Greek debt crisis.

The Dow eventually rebounded to close down 347.80 points, or 3.2%, at 10520.32, its worst percentage decline since April 2009.

Megan McArdle:

Immediate theories:

  • It was the computers, stupid.  This seems likely to have been at least part of the problem; the drop was just too sudden, as was the recovery.  Accenture dropped from $40 a share to one cent at some point, and Proctor and Gamble also had an improbably gigantic drop. I’d guess that some trading programs, somewhere, hit the wrong stock price level and went horribly wrong.
  • The market knows something that we don’t about Germany.  Now that Greece has passed its austerity plan, the rest of the eurozone has to go along.  Germany, the single biggest player, votes tomorrow, and maybe someone knows we’re headed for a nasty surprise.
  • The market knows something that we don’t, but ought to, about Greece.  Greek approval of the austerity plan should have perked things up.  Instead, the markets are in turmoil.  And maybe they’re right to be.  Passing an austerity plan doesn’t guarantee that it will work; Argentina was going through governments like paper plates right before it terminated the dollar peg and defaulted.
  • The market doesn’t know anything we don’t, but some idiots panicked when Mohamed El-Erian said that Greek contagion was on the verge of spreading.  One of the more comforting explanations; if so, the idiots seem to have thought the better of it.
  • Someone unwinding a giant euro-yen trade touched off some sort of temporary panic as people fled risky assets.  That’s au courant on Bloomberg.  Somewhat comforting–but not very, because if the markets are this vulnerable to panic, there’s an underlying anxiety that may blossom into something worse.
  • Some hedge or bond fund manager is manipulating the market for personal gain.  Maybe.  But a collapse this broad across multiple asset classes is pretty hard to orchestrate, so not very likely.

Update:  Via Twitter, NASDAQ seems to be confirming that at least part of the problem was a faulty Proctor andd Gamble quote.

Daniel Foster at National Review:

So, now the word is that the sell-off was set in motion or exacerbated by a Citigroup trader “fat-fingering” a trade — literally pressing a ‘b’ for billion instead of an ‘m’ for million or somesuch — on Proctor & Gamble, which went off a cliff around 2:30 P.M.

My guy on the Street characterized the ensuing cascade thusly:

“. . .then the equities desks on the street were all told to reign [sic] in risk and then computers kicked in.”

In other words, P&G’s 37 percent nosedive was only responsible for 172 points of the 992.60 the Dow lost in the slump. The rest was market reaction — and part of that was computerized and automated.

Henry Blodget at Business Insider:

Some idiot may well have made a typing error–allegedly entering a sell order for $16 billion when s/he meant $16 million. And there may well have been a lot of other electronic trading problems as traders freaked out–stocks trading for a penny, stocks gapping down, and so forth.  And these may have contributed to the panic.

But anyone who focuses on what “went wrong” with systems or trading errors is missing the forest for the trees.

More than an hour after those freak “trading errors,” the DOW closed down 350–a very sharp decline. The DOW is now off more than 800 points from its recent peak.  After months of lower and lower volatility and more and more complacency, the market’s tone has changed significantly in recent days.  And not for the good.

So what’s the real reason the market crashed this afternoon?

Because markets sometimes crash.

Seriously. That’s how markets behave–especially on the downside.  And it doesn’t take a long look at the fundamentals to figure out why some traders (sellers) might have been quick to dump their stocks today and lock in their gains. Or why other traders (buyers) might have decided to wait a few minutes to see just how good prices were going to get.

Marketplace at NPR

The timing of that 100-point fall could not have been worse: stocks had started selling off about five minutes earlier, and so the 100-point drop came into a market which was already getting jittery and panicked. The velocity and severity of that drop in the Dow immediately triggered stop-loss selling in the market more generally, which then started feeding on itself: even as P&G’s share price was recovering, bids were falling away rapidly in the other 29 Dow components, and at one point the Dow was down just a hair short of 1,000 points on the day.

But the fact is that none of these numbers are all that meaningful: what we were seeing was traders flailing around in a context of limited information and liquidity, trying to get a grip on what was or wasn’t going on. There was always the possibility, after all, that the sellers knew something they didn’t, and that stocks were actually falling for a reason. So it took a few minutes for the market to realize that it was all just market volatility — and therefore a great buying opportunity for any trader.

It’s been a very impressive day to learn how the stock-market sausage is made: I think we just saw the largest intraday fall, in point terms, that has ever happened. But the bigger lesson is that in the short term, any market can fail temporarily. The question is whether the jitters from this afternoon are going to mean increased volatility and risk aversion going forwards. My feeling is that, yes, they both will and should.

Ezra Klein:

But whatever the ultimate trigger, the drop was too big for the cause to be this uncertain. What you’re seeing here is a very, very fragile market. There’s so much unknown risk out there — notably, but not solely, in Europe — that quick movements are sending everyone running for the door. That is to say, we’re seeing the return of financial-crisis psychology, where people fear because they don’t know. That’s why very calm people like David Cho are saying very scary things.

UPDATE: Robert Wright and Jim Pinkerton at Bloggingheads

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1 Comment

Filed under Economics, The Crisis

One response to “Fat Fingers Dance On The Keyboard And We All Take The Plunge

  1. Pingback: What We’ve Built This Weekend « Around The Sphere

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