U.S. regulators and stock exchanges are searching for answers after what is believed to be a trading error set off a heart-stopping plunge in markets that rivalled the crash of 1987 for ferocity.
Unnerved by fears about Greece's debt woes, investors were already sending stocks lower early on Thursday, but in mid-afternoon, without any apparent trigger, shares went into free fall. At one point, the Dow Jones Industrial Average had tumbled nearly 1,000 points, or 9 per cent, before snapping back. It ended the day down 3.2 per cent.
In a tacit acknowledgment that markets had gone haywire, the Nasdaq stock exchange said it would cancel all trades executed between 2:40 and 3 p.m. Thursday, during which shares oscillated more than 60 per cent beyond earlier levels, though it maintained that its systems had functioned normally. The all-electronic trading platform operated by the New York Stock Exchange said it, too, would annul trades.
Uncovering how $700-billion of U.S. stock-market value was vaporized in less than 10 minutes is the task ahead for market regulators. Both the Securities and Exchange Commission and the Commodity Futures Trading Commission said they were reviewing Thursday's "unusual trading" and plan to make their findings and recommendations public.
The dramatic few minutes when stock markets fell and rose again
Thursday's dive was "one of the most extreme moves I can ever recall, including 1987," said Steve Sosnick, equity risk manager at Timber Hill LLC, the market-making unit of Interactive Brokers Group Inc. in Greenwich, Conn.
The abnormal trading activity comes at a delicate juncture for financial markets and Wall Street. Investors are increasingly anxious that European policy-makers are allowing Greece's debt crisis to spiral out of control and spread to other countries. Many had hoped that the European Central Bank would announce bold steps to rein in borrowing costs on Thursday, which it did not do, prompting shares to lose ground.
For average U.S. investors, Thursday's wild trading will once again shake their confidence in the stock market, already battered by the financial crisis and subsequent controversies like the civil fraud charges against Goldman Sachs Group Inc. In minutes, companies that are household names saw their share prices evaporate. Philip Morris, the world's largest publicly traded tobacco maker, at one point had sunk 96 per cent to $2. It ended the day at $47, down just 3.5 per cent.
Much of the scrutiny will focus on whether computer-driven trading caused or exacerbated the plunge. Such automated trading has long worried some investors and regulators. So-called program trading has often been blamed for the 1987 crash in stock markets, and while the nature of electronic trading has changed radically in the more than two decades since Black Monday, the idea of humans taking a back seat to computers in markets still unnerves many.
"I think the machines just took over," said Charlie Smith, chief investment officer at Fort Pitt Capital Group. "We've known that automated trading can run away from you, and I think that's what we saw happen today."
The focus now will shift to finding the cause. Traders said it may have begun with what they call a "fat finger" - when a trade is bungled by hitting the wrong key on a keyboard, perhaps b for billion instead of m for million.
Speculation revolved around Citigroup, with rumours that a trader there had accidentally sold much too much of something. Some traders said that it was shares of Procter & Gamble Co., which experienced a huge drop, plunging to $39.37 from about $60 near the beginning of the sell-off. Other traders said it could have been a futures contract tied to stock prices. Citigroup said it found no evidence that any of its traders were involved.
Whatever started the carnage shortly after 2:30 p.m., the damage spread fast as computer trading programs known as algorithms kicked in. Some appeared to start selling, while others pulled out of the market altogether, taking all their buy offers with them and jerking the rug out from under the market.
"It was going so fast that it didn't seem like it was purposeful," said Michael Mainwald, head trader at Lek Securities in New York. Stocks can fall quickly, he said, but typically they don't accelerate on the way down.
By 2:46 p.m., the Dow had fallen almost 1,000 points compared with its standing at noon, staying near that level for two seemingly endless minutes before it snapped back, recouping half of those losses.
The spasm rippled through all financial markets. Treasury bond prices soared, gold rocketed higher, and risky corporate bonds tanked.
The bewildering round trip - which all unfolded within 15 minutes - left investors dumbfounded.
Almost every stock in North America gapped lower, from huge companies like Accenture Plc, which briefly plunged to a penny from over $40, to smallish Canadian firms that lost half their value before bouncing back.
"The big difference [from 1987]is the speed that this can all happen," Mr. Sosnick said. "Nineteen eighty-seven took place over the course of hours, this took place here in the course of minutes. The one thing with the electronic marketplaces: the time frames get compressed."
It was a big day for investors lucky enough to be anticipating a big fall, or who had placed what are known as "stink bids" for stocks way below market value.
"When the market was down 1,000 points, we were so way up it wasn't funny," said Paul Ma, international equity manager at Calgary-based McLean & Partners Wealth Management Ltd.
Mr. Ma said he believes that more than just a glitch was at play, and that there's a fundamental case of nerves in the market. By the close of trading on Thursday, the Dow was still down 3.2 per cent. The backdrop remains worrisome, especially with photos of violence in Greece on Thursday's front pages.
Peter McCorry, a senior equity trader at Keefe, Bruyette & Woods in New York, said, "People are on their toes. There's nobody complacent out there."
With a report from The Associated Press