Biggest Points Intraday Fall in Dow Jones Ever

6th May '10 by Edward Croft

20 comments 4980 reads

There are a lot of theories circling as to why the Dow Jones dropped 1000 points in intraday trading today. Some gossip is suggesting someone entered a B for billion instead of an M for million, others are saying it was a 'fat finger' in a rogue Procter and Gamble trade (which dropped 30% at one point!!!), some are saying a hedge fund has gone bust while others are more entertainingly suggesting that Goldman was taking it's revenge on the SEC.

An extremely rare event happened over at alphaville - they pushed out an emergency markets live session which makes for good reading on the topic - http://ftalphaville.ft.com/blog/2010/05/06/222581/markets-live-182/

Dow Plunges 1000 points Meanwhile, it wouldn't be a surprise if most UK investors are making the excuse for missing the whole event for the hours they spent today gazing at the intraday chart of Rockhopper Exploration (LON:RKH) (up 150%).

It seems that Tournesol has shown some exceptional timing in moving into cash in what has proven to be one of the most popular threads of the last week, and on that note it's interesting to see that Barry Ritholtz had moved to 100% cash before this event.

Just thought it would be good to stimulate some discussion on this very unusual day's trading and what the implications may be for markets over the coming week.

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promethean

6th May '10

It seems that Accenture dropped to a penny at one point
http://www.zdnet.com/blog/btl/as-wall-street-freefalls-accenture-does-a-trampoline-bounce/34155

And here's a good tally of all the worst Dow days in history
http://www.foxbusiness.com/story/markets/thursday-intraday-drop-djia-largest/

djpreston

7th May '10

Evening chaps.

Tried to post on this earlier via the blackberry but didn't seem to "take".

Anyways, absolutely extraordinary events. There must have been some massive cockups for those rogue prices to go through as they did even though the exchange can't find any trace of them. Its very very bizarre and certainly won't help nerves in the morning. People I know at Citi say there's worry in the air that the rumours re the problem originating there have some basis in fact.

Will have a gander of that alphaville link now. Thanks

Are alphaville still opening at 12.30am ahead of the gilt market open. That could be very interesting, especially given all the shenanigans over the voting today.

SEC, CFTC reviewing 'unsual trading activity' after Wall Street plunge.

From Marketwatch bulletins.

Mattybuoy

This looks like a large automated liquidation of positions to me. An electronic market order of sufficient size can effectively run instantly and deplete the bid side of the order book before the market makers' bots reset themselves and/or manual buyers move in.

I know for a fact that Interactive Brokers, who are a participant in the prime brokerage space, run such an automatic instantaneous "liquidation at any price" system. Presumably there are other brokers doing similar.

CNBC reporting that a lot of stock and commodity exchanges are cancelling trades around the time of the dip. What is bizarre is that if it were a "software glitch" how did it manage to effect so many exchanges at the same time? Impossible ...

I will stick to my someone big getting closed out theory.

HI Matty

Yep, Ive been told NASDAQ is indeed cancelling some trades with, as you say, no software glitches
.
There have been reports that there has been some hedgie fund being wound down over recent days but this could have been hit by the two apparent fat finger trades.

I know a few people at Citi and they are coming in early (some at their desks already)....

Been trying to see whats happening in the gilt market with the election results, unfortunately My Bloomberg system isnt tying in with my laptop at home.

Fangorn

Looks like the contagion has spread out East. Last I looked Nikkei was down 4% ( 437 points)

Tomorrow wont look pretty if there is any uncertainty over election victor. A hung parliament isn't going to cut it imv. My own personal suspicion is a small Conservative victory

Gilts up nicely though.

Nikkei was down 3% within minutes of the open.

All depends on what happens out in the US Id say - if this is a serious problem then the jitters wont get any better.

Lord alone knows what happens when Europe opens....

Greece is going to have to default. The bailout conditions will drive the populace to complete revolt and do we see a coup??

It's not going to end at Greece imv. Spain is in a similar parlous state, as is Portugal.
Far too many countries have been living beyond their means. And now it is indeed time to pay!

The dominos are about to fall.

Lots of rumours in the FT Alphaville dialogue about European banks with "liquidity problems". Apparently one Italian bank went limit down in Milan this (Thurs) morning.

2008 returns. Only this time there is no saviour. The Germans will not allow the ECB to print money.

That's what I'm thinking anyway.

Ouch, to put it mildly.

So let The greeks and spain default or more likely reschedule.

The Frog banks will be hit the most and the ECB will bail them out (and not impose the same state aid constraints I bet)..

Hmmm, tiredness plsu aclohol - not a goood mix.....

Edward Croft

FTSE 100 is now off 11% since the 15th April. 5th consecutive day of losses. Some are going to start banking on a snapback pretty soon - but I'd hazard to add that we had nine consecutive days of losses in January 2003 and the set up here is looking pretty grim - hung parliament, sovereign debt worries, rogue trades. If anyone can find any statistics on consecutive down day distributions it would be extremely interesting - in the meantime Google's timeline feature is looking extremely handy. The 2003 9-day streak was extremely anomalous... you can see from this chart that 3 or 4 days are pretty much standard - it's just a text search for 'consecutive days of losses'. 5+ starts to look stretched - this stuff is best left to the stat arb guys - but of interest nonetheless.

http://www.google.co.uk/search?q=%22consecutive+days+of+losses%22+FTSE100&hl=en&client=firefox-a&hs=BdI&tbo=1&rls=org.mozilla:en-US:official&tbs=tl:1&source=lnt&ei=lsHjS9zmENOtsAbfqcQu&sa=X&oi=tool&resnum=3&ct=tlink&ved=0CB0QpwU

AnonymousUser858

It seems that Tournesol has shown some exceptional timing in moving into cash

Very generous of you to say so Ed, but although I'm flattered, I can't honestly claim much credit. I think luck and happenstance played a large part in my timing.

That said, I have always believed that in a perfect world an investor should examine his/her holdings every day and reconsider the investment case. If you can't make a case for buying a stock at any point, then the default should be a decision to sell. Of course you have to factor in transaction costs so it isn't always clear cut. But the basic idea is simple enough.

In the past I have fallen way short of my ideal. I mostly tend to follow a LTBH approach, so my typical time horizon is years long - with respect to Dana for example I've been in almost continuously* since the mid-late 1990's. So I tend to be rather blase about "short-term" fluctutations, reckoning that the pendulum will swing back to what I regard as the long term trend.

That has several times led me to being too complacent and staying fully invested despite it being perfectly obvious (at least to me) that trouble was brewing. When the banks imploded and triggered a major market correction I was dumb enough to see the tsunami coming, but to misjudge its scale and to think it would leave my bit of the investing beach unscathed - I did not invest in banks did I?

It's only because my investment portfolio has been devastated twice that I've finally, at long last, developed a healthy paranoia.

What was helpful last week was that my wife happened to be home when the Beeb ran a news article about market jitters. She misunderstood it but brought it to my attention. I responded by doing what I've beleived in for years without actually practising rigorously. I looked hard at every one of my holdings. Most of them have done very well in the past 6-12 months. That made them easy to sell and capture a healthy profit, so that at the time I wrote my piece last week I was 50% in cash - (a typo made that 60 - whoops!).

Large, long term core holdings were more difficult. It took another few days for me to sell my entire holding in Encore Oil (LON:EO.) and to halve my holdings in Dana Petroleum Plc (LON:DNX) and SOCO International (LON:SIA) . As of today I am about 75% cash. Not sure whether I'm going to sell up even more.

I don't expect this to be a long term thing. But I equally haven't got well defined criteria for deciding that it issafe to go back in the water. I'll just wait and see and do what feels right at the time.

* there have been a couple of occasions when I've sold most of my holding in Dana and bought back lower down, but the general approach has been long term hold.

Tournesol - I think your actions are clearly showing the benefit of experience! Last week one of the alphaville team observed the equity markets were "divorcing from reality" when taken in the context of the all the CDS spreads blowing out, a fact with hindsight that we should have reflected on the site :-(

Just got these comments in directly from a hedge fund trader which are pretty eye opening.

The main problem is the disaggregation of volume. Rather than everything going through a single exchange it is now split over 15 or so, so very opaque. It has the illusion of being cheaper to execute since bid-ask spreads are so narrow, but in reality you can't trade any size there, and the cost of execution has increased (transfer of wealth from institutional/retail investors to HF/prop traders.

Check out PM and PG in the US, they fell 60%ish. Fat finger that triggered a mkt wide sell off. Goes to show how illusory the low volatility is. Simply that way as the only people in mkts at moment are active investors. No one that doesn't have to trade is doing anything.

I may be getting a bit carried away - I'm now 100% cash.

feels very strange, but very liberating.

emptyend

I watched the Wall Street events play out in real time last night on Bloomberg TV - and then sat up all night watching the election results. My take on events is this:

1. The Greece situation deserves some global concern but, outside the Eurozone, it isn't worth more than 5% off markets IMO (and we've had that and more)

2. The plummet on Wall Street at c 2.45pm their time yesterday was clearly greatly exaggerated by the "rogue trades". I am reminded of the portfolio insurance issues that created the 1987 crash - and I wonder whether there was some similar sort of set of actions that merely blew through the available market liquidity in a similar way (in both cases I think the entire market came "off the bid" at the same time as there was automated selling pressure continuing). I don't know what the final analysis of the Wall Street wobble will show, but I'd be amazed if the effects last for more than a day or two - and it is quite possible that today's payroll numbers could reverse sentiment in a matter of hours!

.....so Greece and Wall Street are both storms in a teacup for markets, except for companies/markets where there is specific eurozone exposure. From a UK perspective this is much more important:

3. We now have a definite hung parliament in the UK. (Oddly I'd been tempted to bet on the Tories getting 305 seats but could only find a market giving short odds for a 20+ seat range!) How is this going to be resolved? There are various possibilities, but I'd suggest that the stand-out option is for the LibDems to go into coalition or some form of agreement with the Tories and for the Tories to concede an early referendum on perhaps three AV/PR alternatives (Do nothing, AV and some variant of STV). This would give a Cameron-led Government a very strong majority and they could get on with sorting out the economy (where I think there are few fundamental differences in approach). Tricky stuff like immigration amnesties etc can be back burnered until after a PR-based election sometime in 2011......

.....ANY other solution, involving a Labour-led coalition or a Cameron minority Government, seems to me fraught with allegations of a democratic deficit and therefore inherantly unstable - which the markets won't like!

We won't see which way the wind is blowing until Sunday night, I think - but if there isn't a clear guide to the markets by Monday then people will start fearing the worst!

FWIW

Good thoughts ee

My gut tells me that Clegg will not deal with Brown who is so power mad that he'd sacrifice anything to stay in power but if Brown does offer the PR option and Cameron is not willing to then Clegg may feel his hand will be forced.

Certainly Im with the Conservative minority govt option as a first option then a coalition with Clegg who, as you say, seems to have more in common on immediately pressuring matters.

Ive actually liquidated about 12% of portfolios today.

Clients are very nervous after the events of the Crunch and so having some more cash on board is the wisest option I feel.

I simply do not see any way out of the Greece problems and I fear that Spain will inevitably follow - the implications for panic are manifest. I dont think the Gerans will back the bailout of Greece - the elections and also the ruling of the Constitutional Court reqd.

Do we therefore see some form of QE with direct ECB intervention in buying Greek bonds, then Spanish bonds?

I do worry about the European banks, especially our froggie friends and their exposure to Greek debt and then Portugese debt and Spanish debt. Already I was hearing (whilst talking to traders I know in the Us last night while tryingto understand what went wrong over there) that the US banks are increasingly wary about lending to the European banks - could we see another hit on credit flows etc?

Then there is the US tradnig situation yesterday - hedgies in trouble? That was going round for a couple of day before yesterday.

Then there are the concerns over Chinese tightening etc.

All in all, too many potential slip ups for comfort I feel. HAving more cash to hand fels more comfortable.

Ironically, the corporate results look, and indeed are, excellent. Corproate finances are strogn and valuations not expensive.

Vexing times.

Sorry if this doesnt make any real sense. Ive been up now since 2am on Wednesday and so a little highly strung.

As I understand it the ECB's constitution prevents it from doing QE.

Do not under-estimate the German's when it comes to opposing the printing of money. They have actually experienced hyper-inflation, unlike the rest of the developed world.

Meanwhile,

"Overnight Deposits With ECB Rise to 10-Month High"

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aOUapJwqj3dM

Can you spell "liquidity hoarding"?

8th May '10

I’m sure that in the light of the political and financial tumult we’ve witnessed this week, I’m not alone in doing more reading than usual. In my travels today I picked up a link to an article that has rather terrified me. I highly suggest anyone with a taste for doomsday scenarios to give it a good read. There’s enough sustenance there to help endure the next few weeks’ volatilty.

Systemic risk emerges when it appears that the political and legal protections given to members of the economic elite, have been used to subvert the intent of the system. Put another way, the crisis occurs when it appears that the financial elite used the politico-legal structure to enrich themselves through systematically imprudent behavior while those engaged in prudent behavior were harmed, with the political elite apparently taking no action to protect the victims.

And in the light of 1000 point market crashes, and brief glimpses behind the veil of Armageddon - I’m going to leave you with these thoughts from a wonderful blog post by Clay Shirky:

Joseph Tainter wrote a chilling book called The Collapse of Complex Societies. Tainter looked at several societies that gradually arrived at a level of remarkable sophistication then suddenly collapsed. [Romans, Mayans etc]

Early on, the marginal value of [the society’s] complexity is positive—each additional bit of complexity more than pays for itself in improved output—but over time, the law of diminishing returns reduces the marginal value, until it disappears completely. At this point, any additional complexity is pure cost.

Tainter’s thesis is that when society’s elite members add one layer of bureaucracy or demand one tribute too many, they end up extracting all the value from their environment it is possible to extract and then some.

When the value of complexity turns negative, a society plagued by an inability to react remains as complex as ever, right up to the moment where it becomes suddenly and dramatically simpler, which is to say right up to the moment of collapse. Collapse is simply the last remaining method of simplification.”

Biggest Points Intraday Fall in Dow Jones Ever

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Edward Croft

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