The action in the stock market on Thursday May 6, 2010 will be remembered for quite some time. Exactly how big of a deal was this? At just before 3 pm eastern time the Dow Jones Industrial Average was lower by 998 points. That is the biggest intraday loss the United States stock market has ever seen. Basically, today’s action was about unprecedented, and it spooked investors in a big way. The Dow actually dropped from down about 400 points to down 998 in less than 5 minutes at around 2:50 eastern time, only to rally back and finish the day down by 348 points. It was a dizzying ride, and now everyone is looking for answers.
What caused such crazy trading action? There are rumors flying all over the street now that a trading error at a major firm caused this sell off. CNBC is reporting that a trader entered a sell order with the letter “b” as in billion to sell a group of assets (likely S&P 500 futures) rather than “m” for millions. The hypothesis that are many are now giving is that this massive error shook the markets and triggered stop loss selling and “high frequency trades” from computer systems around the globe.
The stock market was performing very badly because of the Greek debt and Euro worries before anything ever happened at about 2:50 eastern time, but the sell off that occurred at that point was far from business as usual. Stocks like Proctor and Gamble and 3M lost 25% of their value in one minute. Does that make any sense at all? The answer is obviously no. Both P&G and 3M are huge consumer staple corporations that should be considered the safest of stocks in a worrisome market. Whatever happened in this short period of time was far from rational.
As an individual investor, what should you make of this action? As someone who has followed the market closely for quite a few years now, my biggest worry is that the move to all technology trading systems can trigger panic sell offs such as this one. There is no doubt that a whole lot of people had stop losses on certain stocks and were forced out of them today because of the trading error and subsequent machine trades. There is a whole lot of great things about technology and the ability to place a trade in less than the time it takes to blink your eye, but this action is a perfect example of the risk associated.
My hope is that what happened in this 998 point barrage of computer selling gets scrutinized closely in the coming weeks and months. The last thing investors need is another reason to worry about the safety of their money.