Plunge in US equities remains a mystery
By Michael Mackenzie and Henny Sender in New York
Published: May 7 2010 18:49 | Last updated: May 7 2010 20:01
The day after $1,000bn was briefly wiped off the market value of US equities, traders were still trying to work out what caused
share prices to plunge and then rebound so dramatically in a matter of minutes.
The conventional wisdom held that an incorrectly typed sell order – one that confused “billions” for “millions”, for example – was the likely culprit.
“The trigger for the sell-off was most likely some kind of errant order, a fat-finger typo, which set off a chain reaction of selling,” said Sang Lee, managing principal at Aite Group. “I would be shocked if that was not the case as the fall in stocks was so sudden and extreme.”
However, despite the persistence of this story, officials were struggling to idenfity a specific cause. “We still don’t know what was the initiating signal for the trading activity we saw on Thursday,” said Jeff Wecker, chief executive officer at Lime Brokerage. “The verdict is still out.”
What was clear was the
ferocity of the fall. Just before 2.40pm on Thursday, the S&P 500 index, the US equity market’s benchmark, fell from 1,120. Inside six minutes, it bottomed at 1,065.79, a slide of nearly 5 per cent. By 3.00pm, the index was moving above 1,120, although still down 4 per cent on the day before, settling 3.2 per cent lower by the close.
Traders said the day had got off to a gloomy start, with fears that
Greece could become the first eurozone country to default on its debt weighing down stock prices. Television images of fighting in Athens reinforced anxieties and encouraged investors to cut risk exposure.
“We already had a significant fear premium in the market and clearly there was some kind of incident which we need to understand,” said William O’Brien, chief executive officer at Direct Edge, one of the four main trading venues for equities.
When the plunge came, traders said it was exacerbated by the
rapid-fire computer systems that post prices and execute trades in microseconds. Such trading accounts for the bulk of volume in US equity markets and it served to reinforce a downward move that saw some stocks trade for a penny or less.
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