The DOW’s Wild Ride

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Anyone who’s in the markets noticed that the DOW opened significantly lower on May 6th, 2010. That in itself isn’t a noteworthy anomaly. What is significant is that around 2:30pm EST, the DOW plunged almost 1000 points in about 15 minutes.
It’s the largest single drop in the history of the DOW.
Now its time to put on our CSI hats and try to figure out exactly what happened.
Four possible explanations have been put forward by the pundits. I intend to analyze each one of these explanations, in plain language so that readers who aren’t experts in world economics or fancy derivatives can also understand, in layman’s terms what’s going on.
First, there’s the fat finger trading rumor. Rumor has it that a trader working for CitiBank accidently pressed the wrong button when selling some Proctor and Gamble stock. The trader apparently typed in a “b” for billion, instead of an “m” for million when making the trade.
To this, I say, let’s get real. A seasoned trader isn’t going to make that mistake. And even if he did, as soon as his position was sold, he would’ve corrected for it immediately before he was short an extra few hundred million shares. So I would be really surprised if that’s what happened.
Second, everyone said that concerns over BP’s oil spill in the Gulf of Mexico had something to do with a coming market correction.
Right! BP stock was actually up after the spill?!?! WTF? Its true. Check it. BP has caused one of the largest environmental catastrophe’s of recent times – in Alaska, fishermen are still complaining about the effects of the Valdez spill 21 years ago – and its stock moved up. Either someone has a great insurer, or a great promoter. Either way, it cannot have affected the DOW.
Third, a lot of pundits have pointed the finger at Greece. A Greek default, they say will cause wide spread havoc in the markets and undoubtedly had something to do with the DOW’s fall.
Not a chance. Here’s why. Take a look at history. That’s the first thing that anyone who’s about to lend money, whether its to a friend, a business or a government, is history.
Greece has one of the worst histories of default in the world. Its as bad as Argentina when it comes to default. So no doubt that was already priced into the debt when it was underwritten.
Greece also was in no danger of not getting their bailout package. A unified Europe, the goal of the EU with the Euro, has been an idea that has been around thousands of years…Alexander, Napoleon, Hitler…all had the same dream, although some of those guys turned it into a nightmare.
And lets not forget…the bailout is coming from essentially the same people who are holding the bonds that were defaulted on in the first place…the European community. So they just gave a dying investment a shot in the arm in order to save money already sunk.
In other words, it has very little to do with America and the DOW. Greece doesn’t produce anything besides olive oil. So it imports almost everything it needs for a quality lifestyle. Unfortunately, America doesn’t produce much…so it won’t be hurt by a lack of imports from Greece.
The final reason postulated for the downturn is high frequency trading. High frequency trading is defined as computer trading programs that can execute up to 1000 trades per second! Here’s how it works. Once a lower limit is hit, and a sell order triggered, all these programs execute 1,000 trades per second to sell. This sends the market into a freefall. Until human heads finally notice and put a stop to it. This in my opinion is the only credible explanation.
In my mind this only highlights the dangers of buying and selling instruments and in ways you cannot comprehend. When markets contain so many derivatives that you require complex computer programs that are capable of executing a thousand trades per second, you’re at their mercy.
And its one more reason I prefer the OTC and Bulletin Board markets. There are no derivatives, and no automated software programs trading the market.