Financial Regulatory Forum

The Big Glitch – trading error or tipping point?

May 7, 2010

Was it a trading error, or the tipping point of market anxiety? A range of potential factors has drawn scrutiny after the record 1,000 point plunge and rebound in the Dow Jones industrial average on Thursday.

While the regulators try to figure out what happended and how to respond, here is some commentary on the fall:

Yves Smith, Naked Capitalism:

“The downdraft did have the look of a monster sell order, but the more credible explanation is that it was either a sudden rise in yen or the euro hitting the magic number 1.225 to the dollar that set off algorithmic traders … it isn’t hard to see this as the son of program trading, mindless computer-driven selling when the right triggers are hit … another side effect of today’s equity market gyrations is further distrust in the markets.”

Damien Hoffman, Wall Street Cheat Sheet:

“The immediate cause was the nosebleed quantity of stop losses waiting just below the S&P 500 support line at 1144. When buyers couldn’t hold the line, sellers pushed prices to the stop loss triggers and … SNAP: the volume of sell orders flooded in from hedge funds and institutions with preordained safety against what everyone fears could be an international version of the Bear Stearns-Lehman Brothers film we saw in the US.”

Joe Weisenthal, Clusterstock:

“ Yesterday’s glitch is producing some fascinating tension between the NASDAQ and the NYSE, or more broadly, tension between old-style trading, and super-fast electronic trading.”

Floyd Norris, New York Times

Norris blames the plunge on “one part nervous traders, one part Greek crisis and one part trader error,” with a dose of central bank complacency. He notes the plunge came as the U.S. Senate is debating an overhaul of financial regulations.

“That no doubt will lead some on Wall Street to say that the markets are warning against making regulation too harsh, but the wild gyrations also serve as a reminder that the efficient markets hypothesis is not a very good model of what actually happens.”

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