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A crash course in changing the world.
Global Markets Drop After U.S. Meltdown See full article from DailyFinance: http://srph.it/c8XYeb
Many on Wall Street say they'd never seen anything like it. One money
manager says he literally fell off his chair. Another says he thought a
nuclear bomb had gone off.
For a market already rattled by
Europe's
growing debt woes, the combination of apparent human error and
high-frequency trading run amok amounted to a perfect storm that
investors will not soon forget.
As a shell-shocked Wall Street started to digest a wild and woolly
Thursday session that saw the largest intraday loss in Dow history, a
growing consensus began to emerge that human and technical failures had
obliterated a market already teetering on the precipice.
Thursday's 20-minute market panic briefly erased $1 trillion in investor
equity before rebounding, and recalled fears of the wild volatility
that accompanied the collapse of Lehman Brothers in September 2008.
Asia Tanks Amid Fears of "Contagion"
Asian markets
plummeted
Friday morning, with Japan's Nikkei 225 stock average closing 3.1%
lower to 10,364.59. The Asia dive stoked analyst fears of "contagion" --
the idea that Greece's debt crisis could trigger a domino effect that
would spread to other European countries and beyond. Analysts predicted
that short sellers would put pressure on the euro and warned of a
European banking credit freeze akin to the U.S. financial crisis.
Early Friday, European futures markets suggested that markets there
would follow Asia down. In Britain, the FTSE 100 index ending up falling
0.2 %, while Germany's DAX slid 0.6%. France's CAC-40 moved 0.8% lower.
In an effort to calm the Asian markets, the Bank of Japan said Friday
it would infuse 2 trillion yen -- about $20 billion -- into the
country's banking system in order to preempt credit jitters.
Among the late-breaking developments in the wake of Thursday's market
debacle:
-- The Nasdaq
says
it will cancel trades on nearly 300
securities that had moved over 60% from their last printed trade
between 2:40 and 3 p.m. Several companies saw their stock prices fall
100% in a matter of seconds. But many other trades were left standing,
including at least one transaction that valued Apple (AAPL)
shares at an incredible $199, down some 20% from the stock's same-day
high of $258 per share.
-- The Securities and Exchange Commission and the Commodity Futures
Trading Commission issued a statement that they are "working closely
with the other financial regulators, as well as the exchanges, to review
the unusual trading activity that took place briefly this afternoon."
Investigators are looking at the hair-raising five-minute period between
2:42 and 2:47 p.m., when the Dow made the largest intraday plunge in
market history, falling a shocking 998 points below its opening level.
-- Rep. Paul E. Kanjorski, a Pennsylvania Democrat and chairman of the
House Financial Services Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises,
says
he will hold a hearing on the meltdown at 3 p.m. Tuesday. Calling the
days events "unnacceptable," Kanjorski says that "in this day and age
and with the use of such complex technology, we should be able to make
sure that our financial markets are effectively monitored and investors
are protected."
-- Sen. Ted Kaufman, a Delaware Democrat, says in a
statement:
"The potential for giant high-speed computers to generate false trades
and create market chaos reared its head again today. The battle of the
algorithms – not understood by nor even remotely transparent to the
Securities and Exchange Commission – simply must be carefully reviewed
and placed within a meaningful regulatory framework soon."
$1 Trillion Wiped Out Before Rebound
In a matter of seconds, $1 trillion in equity -- a figure equivalent to
7% of U.S. gross domestic product -- was wiped out by Thursday trading
before the market rebounded.
Citigroup was investigating
reports
that one of its traders erroneously placed a trade in a derivative tied
to the S&P 500 in an amount 1000 times larger than he had intended,
which could have dramatically exacerbated the nose dive. Once the
freefall began, an avalanche of automatic computer-driven sell orders
was unleashed across electronic markets, accelerating the rout.
In some cases, the trading activity was completely absurd. Accenture (
ACN),
a $40 stock, briefly traded at a penny per share. Boston Beer Company (SAM),
the maker of Sam Adams beer, also briefly lost all of its value --
meaning that it was worth nothing -- after starting the day above $60
per share. Tobacco giant Philip Morris International (PM),
which had opened at around $48 per share, briefly bottomed out at $2
per share. Other securities, including Exelon (EXC),
Radian Group (RDN)
and Centerpoint Energy (CNP)
also saw their stock values vanish in a matter of seconds.
The Wall Street Journal
reports
that "the $9.5 billion iShares Russell 1000 Value Index Fund went from
$59 to around 8 cents in the blink of an eye." WSJ.com's Matt Phillips
put together a list of stocks that lost their entire value before
rebounding. Aside from the aforementioned Exelon Corp., Boston Beer and
CenterPoint, the list includes Eagle Materials (EXP),
Brown & Brown (BRO)
and Iowa Telecommunications (IWA).
All six of those stocks can be found on the Nasdaq list of cancelled
trades.
Focus On High-Frequency, Computerized Trading
Thursday's debacle was a vivid reminder that computerized trading
accounts for 70% of all market activity. Larry Leibowitz, the chief
operating officer of NYSE Euronext,
tells
Bloomberg Television that the sell-off was aggravated
by orders that were automatically sent to thinly traded electronic
exchanges where no corresponding buyers or sellers could be found.
"If you look at the charts you can see fairly clearly where the trades
came in," Leibowitz says. "It's that V-shaped drop where it came down
and snapped right back up. You had some very high-cap stocks trading
down 50 percent or large percentages in a split instant because there
really was no liquidity in electronic markets."
"The fact that it snapped back so quickly made it clear that it was an
aberration," Leibowitz continues. "When a large order or series of
orders comes into electronic markets, they don't really have any way to
recognize either that they're a mistake or to slow them to down to
attract the proper liquidity on the other side. And so the electronic
markets actually traded all the way through the slower New York Stock
Exchange markets where we were trying to slow down trading."
manager says he literally fell off his chair. Another says he thought a
nuclear bomb had gone off.
For a market already rattled by
Europe's
growing debt woes, the combination of apparent human error and
high-frequency trading run amok amounted to a perfect storm that
investors will not soon forget.
As a shell-shocked Wall Street started to digest a wild and woolly
Thursday session that saw the largest intraday loss in Dow history, a
growing consensus began to emerge that human and technical failures had
obliterated a market already teetering on the precipice.
Thursday's 20-minute market panic briefly erased $1 trillion in investor
equity before rebounding, and recalled fears of the wild volatility
that accompanied the collapse of Lehman Brothers in September 2008.
Asia Tanks Amid Fears of "Contagion"
Asian markets
plummeted
Friday morning, with Japan's Nikkei 225 stock average closing 3.1%
lower to 10,364.59. The Asia dive stoked analyst fears of "contagion" --
the idea that Greece's debt crisis could trigger a domino effect that
would spread to other European countries and beyond. Analysts predicted
that short sellers would put pressure on the euro and warned of a
European banking credit freeze akin to the U.S. financial crisis.
Early Friday, European futures markets suggested that markets there
would follow Asia down. In Britain, the FTSE 100 index ending up falling
0.2 %, while Germany's DAX slid 0.6%. France's CAC-40 moved 0.8% lower.
In an effort to calm the Asian markets, the Bank of Japan said Friday
it would infuse 2 trillion yen -- about $20 billion -- into the
country's banking system in order to preempt credit jitters.
Among the late-breaking developments in the wake of Thursday's market
debacle:
-- The Nasdaq
says
it will cancel trades on nearly 300
securities that had moved over 60% from their last printed trade
between 2:40 and 3 p.m. Several companies saw their stock prices fall
100% in a matter of seconds. But many other trades were left standing,
including at least one transaction that valued Apple (AAPL)
shares at an incredible $199, down some 20% from the stock's same-day
high of $258 per share.
-- The Securities and Exchange Commission and the Commodity Futures
Trading Commission issued a statement that they are "working closely
with the other financial regulators, as well as the exchanges, to review
the unusual trading activity that took place briefly this afternoon."
Investigators are looking at the hair-raising five-minute period between
2:42 and 2:47 p.m., when the Dow made the largest intraday plunge in
market history, falling a shocking 998 points below its opening level.
-- Rep. Paul E. Kanjorski, a Pennsylvania Democrat and chairman of the
House Financial Services Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises,
says
he will hold a hearing on the meltdown at 3 p.m. Tuesday. Calling the
days events "unnacceptable," Kanjorski says that "in this day and age
and with the use of such complex technology, we should be able to make
sure that our financial markets are effectively monitored and investors
are protected."
-- Sen. Ted Kaufman, a Delaware Democrat, says in a
statement:
"The potential for giant high-speed computers to generate false trades
and create market chaos reared its head again today. The battle of the
algorithms – not understood by nor even remotely transparent to the
Securities and Exchange Commission – simply must be carefully reviewed
and placed within a meaningful regulatory framework soon."
$1 Trillion Wiped Out Before Rebound
In a matter of seconds, $1 trillion in equity -- a figure equivalent to
7% of U.S. gross domestic product -- was wiped out by Thursday trading
before the market rebounded.
Citigroup was investigating
reports
that one of its traders erroneously placed a trade in a derivative tied
to the S&P 500 in an amount 1000 times larger than he had intended,
which could have dramatically exacerbated the nose dive. Once the
freefall began, an avalanche of automatic computer-driven sell orders
was unleashed across electronic markets, accelerating the rout.
In some cases, the trading activity was completely absurd. Accenture (
ACN),
a $40 stock, briefly traded at a penny per share. Boston Beer Company (SAM),
the maker of Sam Adams beer, also briefly lost all of its value --
meaning that it was worth nothing -- after starting the day above $60
per share. Tobacco giant Philip Morris International (PM),
which had opened at around $48 per share, briefly bottomed out at $2
per share. Other securities, including Exelon (EXC),
Radian Group (RDN)
and Centerpoint Energy (CNP)
also saw their stock values vanish in a matter of seconds.
The Wall Street Journal
reports
that "the $9.5 billion iShares Russell 1000 Value Index Fund went from
$59 to around 8 cents in the blink of an eye." WSJ.com's Matt Phillips
put together a list of stocks that lost their entire value before
rebounding. Aside from the aforementioned Exelon Corp., Boston Beer and
CenterPoint, the list includes Eagle Materials (EXP),
Brown & Brown (BRO)
and Iowa Telecommunications (IWA).
All six of those stocks can be found on the Nasdaq list of cancelled
trades.
Focus On High-Frequency, Computerized Trading
Thursday's debacle was a vivid reminder that computerized trading
accounts for 70% of all market activity. Larry Leibowitz, the chief
operating officer of NYSE Euronext,
tells
Bloomberg Television that the sell-off was aggravated
by orders that were automatically sent to thinly traded electronic
exchanges where no corresponding buyers or sellers could be found.
"If you look at the charts you can see fairly clearly where the trades
came in," Leibowitz says. "It's that V-shaped drop where it came down
and snapped right back up. You had some very high-cap stocks trading
down 50 percent or large percentages in a split instant because there
really was no liquidity in electronic markets."
"The fact that it snapped back so quickly made it clear that it was an
aberration," Leibowitz continues. "When a large order or series of
orders comes into electronic markets, they don't really have any way to
recognize either that they're a mistake or to slow them to down to
attract the proper liquidity on the other side. And so the electronic
markets actually traded all the way through the slower New York Stock
Exchange markets where we were trying to slow down trading."
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