In one of the most dizzying half-hours in stock market history, the Dow plunged nearly 1,000 points on Thursday, May 6th before bouncing back to close down 347.80 points. This represented the biggest intraday decline since 1987. But what made this crash so absolutely shocking is that it happened in the course of less than an hour. Between 2 p.m. and 3 p.m. the Dow lost over 700 points before dramatically bouncing back about 600 points. Two of the 30 stocks in the Dow, Procter & Gamble and 3M, plunged more than 30% in just 15 minutes. Accenture went from trading at around 40 dollars a share all the way down to one cent before bouncing back. Traders and investors were left completely stunned and wondering what in the world had just happened.
So what did happen?
The following are some of the most common theories being put forward to explain what happened….
#1) A Bad Trade
It has been widely suggested that a “fat finger trade” was responsible for triggering the panic. According to CNBC, “sources” have told that network that a trader (possibly at Citigroup) entered a “b” for billion instead of an “m” for million in a trade involving Procter & Gamble.
However, Citigroup has already announced that it has found “no evidence” that it was involved in any erroneous trades. In fact, a statement was released in which Citigroup spokesman Stephen Cohen said this….
“At this point, we have no evidence that Citi was involved in any erroneous transaction.”
#2) A Computer Glitch
New York Stock Exchange spokesman Rich Adamonis says that “there were a number of erroneous trades” on May 6th, and that these could have been caused by computer error.
And the truth is that trading in the financial markets is more automated and more reliant on computers than it ever has been before. Trading literally moves at lightning speed now, and a number of analysts are warning that the pace of the market is so fast at this point that it is really easy for things to spin out of control very quickly.
But if this was really primarily caused by a “computer glitch”, how are investors supposed to have any confidence at all in the market? After all, if a computer error can wipe out half your account in less than an hour, why invest at all?
#3) Cascading Stop Losses
Once the market hits certain technical levels, it is going to automatically start triggering stop loss orders. Once those stop loss orders are triggered, it will push the market down further thus triggering more stop loss orders.
While there have been some protections implemented to guard against this kind of thing, the reality is that it does still happen.
Hackers have become more sophisticated and more cunning than ever before. In fact, the bigger a target is, the more enjoyment most hackers get out of taking them down. Is it a possible that someone could have hacked in to the New York Stock Exchange?
Rogue nations and terrorist organizations have been developing their “cyber warfare” capabilities for some time now. We have been repeatedly warned that someday we will see an “Internet 9/11″. Could this stock market plunge be a preview of that?
#6) Fear Of The European Debt Crisis Spreading
There are mounting concerns in the financial markets about Greece’s financial condition and that the European debt crisis could spread around the globe.
In fact, the Dow has lost 631 points, or more than 5%, in just the last three days amidst worries about the situation in Greece. This represents the biggest three day drop since March 2009.
#7) Stop Hunting
Anyone who has spent much time in the Forex market knows what this is all about. The truth is that some of the big financial sharks in the marketplace seem to really enjoy blowing out stop losses.
So could have this have been a situation where a stop loss hunting expedition spun wildly out of control?
#8) A Real Panic
There is also the possibility that this was a real financial panic. There are huge concerns about what is going on in Europe and the currency markets are fluctuating wildly. The Dow was already down several hundred points even before the massive plunge took place. The reality is that there is a lot of fear in the financial markets right now.
But if it was a real panic, then why did the Dow bounce back so quickly? Well, it is the job of the “plunge protection team” to keep the stock market from declining too rapidly. So did the “plunge protection team” swing into action today? Well, the truth is that we will probably never know because the general public is not supposed to know when they intervene.
In any event, the next couple of days should hopefully make all of this a lot clearer. The trading during the afternoon of May 6th at the big firms will be gone over with a fine-toothed comb, and the exchanges will be closely analyzing their systems for any glitches.
It has already been announced that some of the most erroneous trades will be cancelled. The Nasdaq and NYSE’s ARCA trading unit have both said that they will cancel trades executed between 2:40 p.m. and 3 p.m. on May 6th where a stock price rose or fell more than 60 percent from the last trade in that security at 2:40 p.m.
But this episode shows just how vulnerable our financial markets really are. After witnessing what we saw today, it is going to be really hard to have confidence in the system.
In fact, even if this was just one “bad trade” or a “simple computer glitch”, the reality is that this episode is going to inject even more fear into a marketplace that is already filled with tension.
When fear grips a market things can go south very, very quickly. The truth is that markets tend to fall more quickly than they rise, and if a wave of panic starts sweeping over the financial markets we could see things get quite messy in the coming days.