Many on Wall Street say they'd never seen anything like it. One money manager says he literally fell off his chair. Another says he thought a nuclear bomb had gone off.
For a market already rattled by Europe's growing debt woes, the combination of apparent human error and high-frequency trading run amok amounted to a perfect storm that investors will not soon forget.
As a shell-shocked Wall Street started to digest a wild and woolly Thursday session that saw the largest intraday loss in Dow history, a growing consensus began to emerge that human and technical failures had obliterated a market already teetering on the precipice.
Thursday's 20-minute market panic briefly erased $1 trillion in investor equity before rebounding, and recalled fears of the wild volatility that accompanied the collapse of Lehman Brothers in September 2008.
Asia Tanks Amid Fears of "Contagion"
Asian markets plummeted Friday morning, with Japan's Nikkei 225 stock average closing 3.1% lower to 10,364.59. The Asia dive stoked analyst fears of "contagion" -- the idea that Greece's debt crisis could trigger a domino effect that would spread to other European countries and beyond. Analysts predicted that short sellers would put pressure on the euro and warned of a European banking credit freeze akin to the U.S. financial crisis.
Early Friday, European futures markets suggested that markets there would follow Asia down. In Britain, the FTSE 100 index ending up falling 0.2 %, while Germany's DAX slid 0.6%. France's CAC-40 moved 0.8% lower. In an effort to calm the Asian markets, the Bank of Japan said Friday it would infuse 2 trillion yen -- about $20 billion -- into the country's banking system in order to preempt credit jitters.
Among the late-breaking developments in the wake of Thursday's market debacle:
-- The Nasdaq says it will cancel trades on nearly 300 securities that had moved over 60% from their last printed trade between 2:40 and 3 p.m. Several companies saw their stock prices fall 100% in a matter of seconds. But many other trades were left standing, including at least one transaction that valued Apple (AAPL) shares at an incredible $199, down some 20% from the stock's same-day high of $258 per share.
-- The Securities and Exchange Commission and the Commodity Futures Trading Commission issued a statement that they are "working closely with the other financial regulators, as well as the exchanges, to review the unusual trading activity that took place briefly this afternoon." Investigators are looking at the hair-raising five-minute period between 2:42 and 2:47 p.m., when the Dow made the largest intraday plunge in market history, falling a shocking 998 points below its opening level.
-- Rep. Paul E. Kanjorski, a Pennsylvania Democrat and chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, says he will hold a hearing on the meltdown at 3 p.m. Tuesday. Calling the days events "unnacceptable," Kanjorski says that "in this day and age and with the use of such complex technology, we should be able to make sure that our financial markets are effectively monitored and investors are protected."
-- Sen. Ted Kaufman, a Delaware Democrat, says in a statement: "The potential for giant high-speed computers to generate false trades and create market chaos reared its head again today. The battle of the algorithms – not understood by nor even remotely transparent to the Securities and Exchange Commission – simply must be carefully reviewed and placed within a meaningful regulatory framework soon."
$1 Trillion Wiped Out Before Rebound
In a matter of seconds, $1 trillion in equity -- a figure equivalent to 7% of U.S. gross domestic product -- was wiped out by Thursday trading before the market rebounded.
Citigroup was investigating reports that one of its traders erroneously placed a trade in a derivative tied to the S&P 500 in an amount 1000 times larger than he had intended, which could have dramatically exacerbated the nose dive. Once the freefall began, an avalanche of automatic computer-driven sell orders was unleashed across electronic markets, accelerating the rout.
In some cases, the trading activity was completely absurd. Accenture (ACN), a $40 stock, briefly traded at a penny per share. Boston Beer Company (SAM), the maker of Sam Adams beer, also briefly lost all of its value -- meaning that it was worth nothing -- after starting the day above $60 per share. Tobacco giant Philip Morris International (PM), which had opened at around $48 per share, briefly bottomed out at $2 per share. Other securities, including Exelon (EXC), Radian Group (RDN) and Centerpoint Energy (CNP) also saw their stock values vanish in a matter of seconds.
The Wall Street Journal reports that "the $9.5 billion iShares Russell 1000 Value Index Fund went from $59 to around 8 cents in the blink of an eye." WSJ.com's Matt Phillips put together a list of stocks that lost their entire value before rebounding. Aside from the aforementioned Exelon Corp., Boston Beer and CenterPoint, the list includes Eagle Materials (EXP), Brown & Brown (BRO) and Iowa Telecommunications (IWA). All six of those stocks can be found on the Nasdaq list of cancelled trades.
Focus On High-Frequency, Computerized Trading
Thursday's debacle was a vivid reminder that computerized trading accounts for 70% of all market activity. Larry Leibowitz, the chief operating officer of NYSE Euronext, tells Bloomberg Television that the sell-off was aggravated by orders that were automatically sent to thinly traded electronic exchanges where no corresponding buyers or sellers could be found.
"If you look at the charts you can see fairly clearly where the trades came in," Leibowitz says. "It's that V-shaped drop where it came down and snapped right back up. You had some very high-cap stocks trading down 50 percent or large percentages in a split instant because there really was no liquidity in electronic markets."
"The fact that it snapped back so quickly made it clear that it was an aberration," Leibowitz continues. "When a large order or series of orders comes into electronic markets, they don't really have any way to recognize either that they're a mistake or to slow them to down to attract the proper liquidity on the other side. And so the electronic markets actually traded all the way through the slower New York Stock Exchange markets where we were trying to slow down trading."
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