Week of May 10, 2010
Since 1929 the market has been haunted by memories of “Black Tuesday”. Now a new generation of traders and investors will be haunted by “Fat-Finger Thursday”, the unprecedented 600+ point melt down and subsequent melt-back-up that all happened in a matter of minutes. It was not the size of the drop that was so frightening it was the speed of the thing that left veteran traders gasping in disbelief.
I began trading stock index futures in 1982 and have traded through and witnessed firsthand the crashes of 1987 and 1997, had my picture taken by the AP on April 16th, 2000 while surviving what was then the biggest one-day drop in Dow history, was in the Dow Pit when the planes struck on September 11, and sat at my computer watching the various meltdowns of 2007-2009. Through all that, I never witnessed anything like I saw last Thursday.
I was watching the market on my computer on Thursday afternoon and the Dow was down over 350 points on fears about the Greek crisis. Suddenly the market was down 400, 450, 500, 600, 800 points. I quickly checked and made sure there was no negative news that had just struck the market there was none, no terrorist attack, no more bad news from Greece, no new oil spill. I checked again and now the Dow was dipping below 10,000 down 995 points for the day. And then just as quickly it started back up and before long was back to being down 350 for the day. It was all over in twenty minutes. I know enough about trading stocks and their indices to know that humans cannot trade that fast. Obviously the machines had taken over but what, or who, had set them off?
I turned on CNBC in time to hear the first speculation about a “fat-finger” scenario. In the world of computer trading, “fat finger” refers to someone whose obese digit causes them to hit too large a number or to get stuck on a keyboard key. It generally refers to any accidental order entry or execution. Frankly, I was glad to hear that because my first fear was cyber-terrorism. However it began, the drop moved through the stock, ETF and futures markets with breakneck speed; one sell program setting off another like one of those domino videos that you see on YouTube.
How precipitously those dominos fell were astounding. For example, Accenture (NYSE:ACN) went from over $40 to $1. Some ETF’s were worse: The iShares Russell 1000 Value Index (NYSE:IWD) went from $60 to $0.08; the SPDR International Dividend ETF (NYSE:DWX) went from $40 to zero! Check the charts on these ETFs, I’ve never seen anything like it.
The first explanation was that an overly large order in Proctor and Gamble (NYSE:PG a Dow and S&P component) had caused the NYSE to shut down trading in PG and send the excess selling into the electronic market. PG, which had been trading above $60 suddenly ticked below $40. This could have caused program trading in index futures to accelerate which would have then led to sell-offs in individual stocks. However, when you look at real time quotes in PG and the Dow you can see the Dow had made most of its move before the low ticks in PG.
The story was that a 16 billion share order was entered to sell PG at the market. Which is a problem seeing as that PG only has 2.88 billion shares outstanding. This bad order was originally blamed on Citigroup because apparently on Wall Street it’s fun to kick someone when they’re down. When that didn’t fly they blamed a small Chicago brokerage because Wall Street also believes in blaming Chicago for everything. In 1987 they blamed S&P traders for the crash, and all these years later I can finally admit it, It was us, it was our revenge for the Mets catching the Cubs in 1969.
Since then the head of the NASDAQ blamed the NYSE and its parent company Euronext, and then the NYSE chief made the point that, unlike the NASDAQ, the NYSE is capable of “going manual”. Needless to say, the resulting explanations and finger (fat or otherwise) pointing has done nothing to assuage my fears. Now the Government is saying there was no “fat finger” and they are continuing to investigate what caused the incident. Expect more Congressional hearings, press conferences and some new rules and safeguards.
While the government and the exchanges worry about their next set of safeguards, what about your safeguards? Where were customers filled on the sell stop orders or their market orders during the panic? How much money was lost and, perhaps more importantly, how much confidence in the markets was lost on “Fat-Finger Thursday”? If you were a victim, or if know someone who was, please email us with any horror stories from that day. We want to use them in an upcoming online seminar.
At the Chicago School of Trading, we have decided to assemble a panel of experts in a free, live webinar on how a small investor or trader can protect themselves from the next market meltdown. In this column next Monday we will post the date and time of that forum with a link for registration. Please join us, no matter how chubby your fingers are.