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8 Theories For Why The Stock Market Plunged Almost 1000 Points In A Matter Of Minutes On May 6th

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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.

#4) Hackers

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?

#5) Cyberterrorism

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.

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  • andrew yarnot

    Undersea oil well failure and NYSE failure within weeks of one another once again demonstrates the disdain people of wealth and power have for all humankind, except for themselves. The King of England has won; the 1st Revolution has failed. We are a very stupid people.

  • Peter B

    One can come up with as many theories as they like, what we do know is that gold shot through the 1200 dollar mark again, this was no computer glitch, the phoney paper market would have tried hard to keep gold below the 1200 mark, however the physical buying pressure simply overwhelmed the crimex.
    Is this a prelude of things to come, big drops in the dow, then excuses about computer errors, what aload of crock!

  • Davis

    My thought would be that it was a political signal from the banks and hedge funds to Congress not to proceed with any ideas about breaking up the “too big to fail” institutions or auditing the FED.

    • i THINK YOUR SUGGESTION THAT THE BANKS AND HEDGE FUNDS SENT A MESSA GE TO THE GOVT. RE OVERSITE, IS CLOSE TO THE REAL SOURCE OF THE MAY 6TH. NEAR CATASTROPHE. hEDGE FUNDS AND THE FUTURES (OPTIONS) MARKETS ARE ONE AREA THAT IS CAPABLE OF MAKING THEIS TYPE OF IMPRESSION ON THE MARKET (THE FEAR OF uNCERTAINTY) AND THEY ARE CAPABLE IF NOT WILLING TO MAKE THIS TYPE OF IMPRESSION.

  • My vote is for #6. Next week should also be interesting.

  • PORTERVILLE, CA. — In a matter of moments it was almost all gone. Some suggested computers took over the high frequency trading which lead to the massive losses on Wall St. Other suggested that it was someone who traded billions for “Protor and Gamble” in stead of millions and yet additional on-line reports link Obama’s words of war with “Proctor and Gamble” and a possibly DHS computer spy for Obama who caused the near death of P&G … in order to buy controlling interest – at a discount price. Listen people !!!

  • Jelle Nagelhoud

    In my opinion the main reason is missing. What about the shortage of dollars? This stock crash is similar to the one that occured in september, as Republican Paul Kanjorski explains in this video.

    http://www.youtube.com/watch?v=pD8viQ_DhS4&feature=player_embedded

    European Banks are in need of dollars and have been forced to sell their dollar assets. A good indication is the jump of the TED spread.

  • Mike

    “Germany calling. Germany calling” AFP: Merkel blasts ‘treacherous’ banks in Greek crisis

    GOP continues effort to thwart EU bailouts – The Hill’s On The Money

    “If it is vor you vont, then ve haff vays and means of making you sink. Our U boats haff already torpedoed your precious Dow Jones once, you vill surrender or be exterminated. Ve are No 9 on your list.”

  • charlie post

    Automatic computerized trading kept hitting predetermined stops allowing a cascading market. No buyers, only sellers. Too many sellers trying to go through the exit at once.

  • Ralph Pottertill

    When I used to work on Wall Street it was impossible to sell billions of stock at a time. You need to hold billions of stock to make a billion trade. I agree with #6. The banks hold more stock in the exchange than anyone would like to believe. In fact the real reason they are not lending is because much of the TARP money is invested in the markets. Not a good idea to break up the banks at this volitile time.

  • in response to andrew yarnot, very well said.

  • Uncle_Meat

    Backed out trades? Fine, if you had a stop loss order out there and your stock sold at 60% loss or more. What if my stop loss resulted in a 50% loss of equity? Tough luck pahdner, why don’t you just move along…

  • Dave

    #10) Conspiracy theory. Markets don’t drop like that. Remember when Paulson threatened Congress to pass the bailout bill, otherwise the market would crash and there would be martial law? Maybe he wasn’t bluffing. 2 years later. The crash occurred right after the House passed the audit the fed bill, while Bernanke and the lobbyist were rallying against it. Now the bill has been inexplicably watered down significantly after that event.

  • Tim

    The answers will surely be revealed by an investigation of the buying activity at or near the lows of the big move and these are the trades that should be cancelled. Don’t ask me who will continue to participate in a market where your trades can be cancelled at the whim of regulators and where this rampant manipulation of the markets continues to occur

  • Union Jack

    #6 which led to #8

  • mr. noatak

    my opinions only:

    I have visited this subject on other blogs. If the massive drop in the stock indexes turns out to not be related to a computer glitch, malfunction, or errant keystroke, then the trades during the critical drop and rise should not be cancelled. What if a month from now you lock in a ten or twenty percent gain on a trade, only to have it cancelled because of another glitch? Where will it end?

  • Natovr

    Stock markets around the world fell because the UK just voted in a hung parliament. I don’t see that reason up there. Keep up with international news, people :)

  • Murph

    I don’t believe that there were any trading errors, computer glitches or hackers. With microsecond trading schemes and hedge fund manipulation Wall Street has rigged their big casino to the point that Thursday’s events were inevitable. The banks own Wahington, so don’t expect any reform while the bankers are playing with everybody else’s money.

  • Gobaby

    I opt for number 3. Of the rest only 6 and 8 are plausible.

  • Scott V

    No glitch. I was watching my futures contracts in real time. This was programmed selling. The market went NO BID, and you saw the results. Funny how they don t ask questions during melt ups when the market goes ” No Ask”. The crooks got burned by their own HFT systems and now they want their money back. Eff Em

  • Dead President

    It was a test/ window to see how fast people would respond to the dropping market.

  • Go and listen to this spooky audio Stock Market Crash Pit Audio As Market Goes Into Meltdown 2010
    on May 6th 2010…..INSANE!!!

    Listen Here => http://www.youtube.com/watch?v=4jUzigCDavU

  • mike m

    An economy still runs on fuel.
    If your in energy stocks (companies and not etf)
    don’t panic. they hit rock bottom in 2008 and bounced back. They will bounce because no major industry runs without coal, oil and natural gas, at least at this time, and china is building a lot of cars. Energy is the place to be. Happy trading.

  • sam

    One word describes the reason for the Crash. Obama.

  • dave

    how about simply, this was a test of someone’s ability to manipulate the stock market. that it was done deliberately, as george soros crashed the bank of england in the 90’s, to see what would happen. after all what happened to the stock that went from $40 to pennies and then back up? who benefited? i do not believe this was an accident or caused solely by economic fears. someone planned this and activated the drop. follow the money. i wish i could but the fact of the matter is they will never announce who was behind this, all in the name of protecting the market. but what about protecting the investors?

  • vess

    Anybody remember April 2000 – soon after the top in March? The markets spiked down intraday only to recover back almost immediately. We all know what happened in the next few months…

    The Plunge Protection Team can fight sudden downspikes. They can’t fight the main trend.

  • Some guy named Charlie from Montana knows.

  • Rusty Brown

    No. 3 – Cascading stop losses. You could see it on the daily chart of the DJIA. The market started down, then steepened more and more minute by minute, until it was going straight down. There was no single point where the market suddenly turned down. No doubt programmed stop-loss routines contributed a lot once the process got started.

  • I don’t think it matters what the cause was, it’s another signal that it’s all a house of cards and the little guy is at a huge disadvantage. You need hard assets rather than soft assets like stocks. The best way to deal with it is to get control of your finances, get out of debt, install a geothermal system for heat and build a cold storage for the potatoes you grow in your garden. You can “Thrive During Challenging Times” even if you’re not T. Boone Pickens. http://www.cammather.com

  • Sandman

    Clearly, it was cyberterrorism, but not from “Al-Quaeda” or anyone else..it was from Goldman Sachs who has the technology to manipulate markets. They sent a signal to the SEC for trying to investigate their criminality.

  • X Pay-Triot

    Global banking cabal threatened the US Senate that if they pass “Audit the Fed” this is what we can do. Direct, deliberate and effective blackmail against the US govt.

  • X Pay-Triot

    S604 was supposed to go to a vote that same day. go figure.

  • Joe Doe

    On 24 July 2009, Karl Denninger of The Market Ticker accused high-frequency traders of “intentionally probing the market with tiny orders […] to gain an illegal view into the other side’s willingness to pay. This pattern of offering [sell orders at different levels] was intended to do one and only one thing; manipulate the market by discovering […] a hidden piece of information – the other side’s limit price!” He went on to argue that “the presence of these programs [would] guarantee huge profits to the banks running them” and that “retail buyers would get screwed as the market [moved] much faster to the upside than it otherwise would.”
    Interesting link http://www.itg.com/news_events/papers/AdverseSelectionDarkPools_113009F.pdf

  • bailoutbenny

    No small coincidence that Goldman Sachs was being harassed by the SEC when this whole “panic” was triggered? Perhaps a shot across the bow of the regulatory ship by the money masters? A you F with us, we’ll crush you symbolic gesture? A don’t forget who pays who around here reminder?

    A firm with the most prolific connections in every government the world over has got to be able to pull off something as simple as a 900 point drop in the DOW.

  • One can only speculate.

  • rsmllc

    A 1,000 point drop in 10 minutes is absolutely NOT natural or market created. Plain and simple, the banks did not like the banking reform being contemplated by DC, and dropped the markets to show the pols who’s boss. Just as they did in Sept 2008. It’s so obvious, it’s painful, so why did the writer leave this off the list?

  • S Carmichael

    How about the most obvious answer: one or more major players (the Fed?) unloaded at the top.

  • dave

    Since we’ll never know what happened(or trust the reasons fed to us by the government),it just adds another reason to buy gold.
    How anyone can sleep at night while having a couple hundred thousand in the market is a mystery to me(mom!).
    I’m up 95% since I purchased the physical barbarous relic and I sleep like a baby.
    Someday this FIAT paper/stock market racket will end & I don’t think that it will be pleasant.

  • Someone pulled $1 Trillion out of the market real quick and then put it back gaining a percentage on the way probably worth billions. Money is never lost in the market, they told the truth about that in the movie Wall Street. Wall Street is the biggest criminal operation on the planet.

  • Travis McGee

    PG never traded lower than 57 on the NYSE.

    Accenture never traded below 37 on the NYSE

    the lower prices all occured on the fully electronic markets, which lasck the liquidity of the NYSE

    it was caused by some panic sellers, and exasperated by the electronic markets, which lack the liquidity of the big board.

  • TCG

    If I wanted to skim off a giant pile of money from the stock market, I would write a simple program which would, on command, massively short a number of stocks. The sales would be spread out somewhat in time and distributed, about 12,000 shares each and through a number of accounts, brokers, and markets. I would pick a day when the market was already down due to bad news, and set off my bomb. The downdraft would trigger piles of stop loss orders, exaggerating the movement, and when the momentum was exhausted, I would cover the shorts in the same way, driving prices upward again to nearly the same levels they started from, leaving my pockets lined with other people’s cash. The whole thing could take, say, a half hour.

    What would the daily graph of a stock targeted in this manner look like? Sort of like PG’s?

    Just for the record, I have not done what I describe above, but some insidious player(s) may have.

  • my opinion it was a trial run to see what chess pieces would be moved. An who an what would run to the doors of gold. What nwo countries would off from the plan.

  • B. Trog

    It’s the Plunge Protection racketeers. The NYSE is a branch of the Federal Gov’t by now, and the numbers are controlled by the US Gov’t – as long as it has the liquidity to withstand a run. I think someone took a shot at the Plunge system to see if it worked. Index futures buying stopped the crash – for now.

  • Sagar Pai

    Market reacting or panicking to a 1000 point fall? And rebounding back again? So, effectively some people panicked for 20 minutes and pulled down the market and 20 minutes later they were like, “Ah! No, everything’s fine!” ???

    September 29, 2008
    Following the Lehman fiasco, the Congress tried to vote down the first bailout.
    Market plunged 778 points.

    May 6th, 2010
    All were talking about auditing the big banks and The Big Daddy – Fed Reserve who were against it tooth and nail.
    Market plunged 998 points.

    Coincidence, anyone??

  • John

    The Fed doesn’t want to be audited. The current administration got a 1,000 point lesson in what happens when politicians seek to interfere with the wishes of the Fed. Interestingly, the Vitter ammendment was removed right after this DOW plunge.
    Will there ever be an independent audit of the Fed? I’d say that has as much a chance as an independent audit of the gold in Fort Knox 😉

  • Tracy Wolfe

    It’s very simple to explain. Simply look at a chart of the VIX and see how it had been steadily falling for over a year. On May 6th it took out the bounce of the VIX set on Feb. 5th. That was the “uncle”-point. The VIX blew through that point tripping a lot of stops. The market now is set to crash, taking the VIX over 100. It will be a sight to behold.

  • William Roberts

    Several of you have hit on the real reason for the plunge. It was a carefully planned test to see how people, companies, states, banks, and governments would react.

    Once all the data is analyzed, the real deal will make the test look like a Sunday picnic.

    Mark my words. It WILL happen.

  • Keshava Aumritum

    The market cannot crash .. the market can never crash again. Google the Plunge protection Team or Executive order 12631 singed into law by Reagan.

    The FED is plugged into all the major markets of the world. If any market starts to go down too fast the fed has unlimited funds to buy up stocks to stop the fall. in the states it has the further power to stop all trading.

    (President’s Working Group on Financial Markets, colloquially the Plunge Protection Team , about the protection group before the market falls, short PPT) was established by Executive Order 12631 [1] on 18 March 1988 from the President of the United States then , Ronald Reagan.

    • Pierric Couderc

      Yep, like in 2008-2009!! LOL

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