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Why did the Dow just lose 1,000 points?

Dow Falls in High-Speed Drop - WSJ.com_1273176755961.jpeg

Here's a comforting answer: No one knows. But everyone is freaked out. Peter McKay offers context:

The Dow went into freefall, tumbling through 10,000, before dropping as much as 998 points, or 9.2%. The biggest closing point drop in the Dow's history occurred on Sept. 29, 2008, at the height of the financial crisis, when the Dow ended the day down 777.68 points, or 6.98 percent. The Dow has since pared its losses but remains sharply lower, down 492 points, or 4.45 percent.

So what's going on? A lot of people are blaming it on a mixture of a computer glitch that made a couple major stocks (notably Proctor & Gamble) look like they'd tanked and fears over Greece. Megan McArdle rounds up some additional theories.

But whatever the ultimate trigger, the drop was too big for the cause to be this uncertain. What you're seeing here is a very, very fragile market. There's so much unknown risk out there -- notably, but not solely, in Europe -- that quick movements are sending everyone running for the door. That is to say, we're seeing the return of financial-crisis psychology, where people fear because they don't know. That's why very calm people like David Cho are saying very scary things.

By Ezra Klein  |  May 6, 2010; 4:20 PM ET
Categories:  Economy , Financial Crisis  
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Comments

rumor I just heard is that someone put in an order to sell one billion instead of one million at one of the institutional investors.

Don't know if its true or not but you'd think there'd be fail-safes for that type of thing.

Well someone's going to be canned over that one if that's the case.

Posted by: visionbrkr | May 6, 2010 4:25 PM | Report abuse

Mr. K, you say "no one knows." Mr. Cho says it's Greece. Hello?

You say "everyone is freaked out." You seem to be, that's for sure.

Well, I'm not. And I suggest that phrases like "people fear because they don't know" are incredibly simplistic. The stock market, and business in general, always carries a risk component. People don't know all the time.

Remember that discussion yesterday about analytic reportage intersecting with opinion? Maybe a bit more analysis and a little less knee-jerk opining is called for here.

Posted by: MsJS | May 6, 2010 4:45 PM | Report abuse

Is it true the Fed has $100s billions invested in the market to prop it up and that at some point it needs to sell those holdings? Could this be related to this historic drop, especially with threats of sn audit becoming more urgent?

Posted by: Lomillialor | May 6, 2010 4:45 PM | Report abuse

This just proves the market works / people are rational!

Time to privatize Social Security!

Posted by: AZProgressive | May 6, 2010 4:53 PM | Report abuse

I'm with MsJS. That McMegan article was beyond useless, too.

Posted by: rglvr | May 6, 2010 4:58 PM | Report abuse

Ezra,

Big drops can occur with lots of uncertainty about the cause. There's still uncertainty around 1987.

http://en.wikipedia.org/wiki/Black_Monday_(1987)

Posted by: justin84 | May 6, 2010 4:59 PM | Report abuse

I just saw a movie Hollywood Wall Street manipulation and the audience was pretty shocked. It was told through the eyes of Sirus XM investors that nearly went broke because of naked short selling. The movie was called "Stock Shock" and is now on DVD just about everywhere. Movie trailer is at www.stockshockmovie.com

Posted by: JVMfan | May 6, 2010 5:05 PM | Report abuse

Yes, I heard a $15 million sell order went in at $15 billion. Oops. Greece is certainly in the mix, but I don't think it was all of it. Maybe it's the thought of Gordon Brown crying that sent in flying?

Posted by: JJenkins2 | May 6, 2010 5:20 PM | Report abuse

Greece, Portugal, Spain, Ireland, Italy... too much sovereign debt to ignore. It's not a matter of when to bail them out, it's whether it's even possible to bail them out.

First sign of trouble and it's a mad rush for the exit and into the next great bubble... US Treasuries.

Posted by: millionea81 | May 6, 2010 5:38 PM | Report abuse

"Remember that discussion yesterday about analytic reportage intersecting with opinion? Maybe a bit more analysis and a little less knee-jerk opining is called for here."

MsJS, you don't seem to have the slightest clue about the nature of a blog.

By definition, the writing is very current (and therefore often speculative) and it will include the writer's opinions.

If that annoys you, the solution is to no longer read the blog, not to post complaints that blog posts contain opinion, are sometimes written on the fly (before all the facts about a subject are clearly known), and will therefore contain questions as well as answers.

Posted by: Patrick_M | May 6, 2010 5:46 PM | Report abuse

"Mr. K, you say "no one knows." Mr. Cho says it's Greece. Hello?"

Reporting now suggests that one can attribute the overall loss at the close mainly to Greece, but the giant thousand point dip (that stabilized as quickly as it happened) is due to a trading error at a major firm. The dip was mysterious at the time that Ezra made the post and some were speculating about a possible computer malfunction at the NYSE.

Posted by: Patrick_M | May 6, 2010 5:52 PM | Report abuse

http://www.cnbc.com/id/36999483


watch the video too.

They've already said that the trades of P&G won't hold.


The issue is when you mix in a huge mistake like that trade along with the already volatile market, fears of European debt, etc it makes for a scary mix.

Posted by: visionbrkr | May 6, 2010 5:56 PM | Report abuse

The rumor of a trade going awry has been denied.

Things were down about 300 when they suddenly fell off a cliff. Then people seem to have believed it was overdone and buying started that got it back to where it was when it fell off the cliff (down about 350). It seems likely that st some point a bunch of quant funds with similar trades on and similar algorithms all went off at once, cascading the market down.

The head of the NYSE explained on CNBC that when they sense an erroneous price caused by order imbalances they can briefly (30-90 seconds) halt trading in a stock until buy orders come in. But other exchanges don't honor that, and the stock may trade elsewhere. Procter printing at 40 and Accenture at, evidently, 1 cent were caused by such imbalances, he said.

Yes there is Greece and yes it is risky. OTOH we do more business with Asia and Latin America than Europe. So it seems much more likely to me that it was a sell-off that tripped a bunch of sell orders that then cascaded the market down. That is pretty much what happened in 1987.

Which is why I think we really need a transaction tax. We have to take some of the profit out of rapid-fire computerized trading and the gov't (which is to say all of us) ought to make some money off this.

For the conspiracy theorists, it is interesting that Goldman Sachs did not have the "fat finger" pattern of the market generally or most stocks. Instead it started down earlier and had a broader, shallower drop.

Posted by: Mimikatz | May 6, 2010 5:57 PM | Report abuse

It'd be great if we could pass some universal health care with only an extra $1Trillion in debt cost to the taxpayer, then we'd be out of this mess.....

Posted by: jercary | May 6, 2010 6:40 PM | Report abuse


Do you believe a trade error caused the market to plunge 1,000 points and recover 700 points in less than 10 minutes? Vote

http://www.youpolls.com/default.asp

.

Posted by: usadblake | May 6, 2010 7:14 PM | Report abuse

I heard two NASA clean-up guys sat down in a rocket for lunch and one of them accidentally pressed "launch."

Posted by: dpurp | May 6, 2010 9:31 PM | Report abuse

The panic is so great because everyone, including the proprietor of this blog, knows this country is now running on lies. The enron style accounting put forth by congress for the "healthcare" "reform" bill, "Affordable" care, is a complete sham and everyone knows it. Everyone knows it will cause horrible damage to our financial house. Shakespeare wrote: When my love swears that she is made of truth, I do believe her though I know she lies. That describes the attitude of many toward the president.

Posted by: truck1 | May 6, 2010 10:05 PM | Report abuse

You say "everyone is freaked out."
"Well, I'm not."

well, good for you. after the deep perturbations that have affected hard-earned savings and investments of most people, you are certainly the exception, rather than the rule.


Posted by: jkaren | May 6, 2010 10:27 PM | Report abuse

"The panic is so great because everyone, including the proprietor of this blog, knows this country is now running on lies"


please stop using the word, "everyone."
it is simply untrue.
and since i vehemently disagree with your point, you see, you cant use the word, "everyone."

the last two presidents had our country running on lies.
you are complaining about barack obama, after bill clinton?
after the lies of george w bush, causing war and suffering in iraq? after halliburton?
after the way they lied to the american people?

barack obama is a wise saint, compared to our last two presidents, not to mention, our last vice president, who masterminded and presided over the lies that cost countless lives and suffering......an administration built on lies, deception, paranoia and ineptitude....

president obama has to undo all of this damage, and it is a formidable task.
subtract from "everyone," all of the many who still support and love him. there are many of us out here.


Posted by: jkaren | May 6, 2010 10:42 PM | Report abuse

jkaren: I'm not freaked out either. Just depressed. Does that count?

Posted by: Kevin_Willis | May 6, 2010 10:58 PM | Report abuse

I'm not freaked out either. Just depressed. Does that count?

sort of.
:-)

Posted by: jkaren | May 6, 2010 11:03 PM | Report abuse

"I'm not freaked out either. Just depressed. Does that count?"


and just last night, before i fell asleep, i was thinking....
my savings are looking better, and anthem-california is not proceeding with my 39% rate hike....things are looking a lot better!
what a difference a day makes!

Posted by: jkaren | May 6, 2010 11:09 PM | Report abuse

"And I suggest that phrases like "people fear because they don't know" are incredibly simplistic."


that is not simplistic.
on most days, drops in the market can be attributed to world or domestic events, economic data, earnings reports, and all of the machinations of institutional trading.
on most days, people fear things that they do understand, but an extraordinary drop like the one that occurred today, caused fear, particularly, because people didnt understand it.
perhaps you dont, but i would imagine, most people who worked for a good part of their lifetime to save and invest their money as best as they can do become fearful when they see something like what happened today.

Posted by: jkaren | May 6, 2010 11:47 PM | Report abuse

"So it seems much more likely to me that it was a sell-off that tripped a bunch of sell orders that then cascaded the market down."

I know less than nothing about the stock market, but this was my immediate response when I heard about this event today. Consequently, I have my doubts about it. We'll see...

Posted by: slag | May 7, 2010 12:01 AM | Report abuse

Friends don't let friends link McMegan.

Posted by: zosima | May 7, 2010 1:36 AM | Report abuse

"I know less than nothing about the stock market, but this was my immediate response when I heard about this event today. Consequently, I have my doubts about it. We'll see..."

Since there were certain sound stocks that immediately lost all of their value, and that seems to have weighed down the average, the scenario of an error involving too many zeros on a set of sell orders now seems extremely plausible. Still, at 2 am Friday EST, what happened during that frightening plunge and recovery is still unclear. Thus the wingnut peanut gallery that was criticizing Ezra for saying that no one knows what happened on Thursday afternoon look more foolish than ever.

I agree with jkaren that ordinary working people with retirement savings pegged to stock values have every reason to be "freaked out" with the renewed market volatility, and the potential of a growing financial crisis in the EU. If you aren't at least a little freaked out, you aren't well informed.

Posted by: Patrick_M | May 7, 2010 2:18 AM | Report abuse

Patrick,

but MimiKatz said that "The rumor of a trade going awry has been denied." So CNBC et al are wrong, no?

but seriously. Be concerned yes. Freaked out may be a bit much though. I'm still leaning on the fact that dollar cost averaging works. Anyone buying in now with their mutual funds, 401k contributions, pension contributions are just getting a discount now.

See, there's always a bright side and its Friday too!!

Posted by: visionbrkr | May 7, 2010 8:20 AM | Report abuse

Patrick_M, here I think you're defending whipped air.

Ezra's blog is economic policy news, and as someone who proved themselves very knowledgeable about health care policy, I think most people come to think of Ezra as just as knowledgeable at economic news/policy, including investing. His economic policy is up-to-minute and thorough and he is very well-informed and connected, but I think his writings on business and investing aren't nearly at the same level as his other stuff.

Case in point, linking to the McMegan article, which provided nothing of value to an investor, as it tried to theorize why the market moved the way it did in a day, and only served to cause more confusion and scare those 'working people with retirement savings pegged to stock values'.

A market's day to day movements are the actions of thousands of emotional actors and computers programmed by those same actors. Just because news outfits gives a couple reasons for market movements at the end of the day doesn't mean the reasons are right or the practice is right. Far from it--it perpetuates the fallacy that the market moves in a given day because rational beings are making rational decisions based only on rational incentives. In the very long-term, that is correct, as those decisions balance out. But in the short-term, day-to-day or month-to-month or even year-to-year, that is not the case.

Ezra did something worse--he became a business news cable channel for this one blog post and pretty much whipped up a whole lot of nothing. And while the purpose of a blog might be to speculate on very current events, I prefer his longer pieces, not his cable news style updates. Look up news and commentary from 1987 or other crashes (not to mention, every single other day) and I bet it sounds as overly-concerned with a daily movement.

Also, if 'working people with retirement savings' have every reason to be freaked out, then they shouldn't be investing in the stock market. If their temperament is to fear with Ezra and the rest of the commentariat every time the market drops a lot, then they are most likely speculating, as the value of a business is derived not from its stock price but from its underlying assets and long-term competitive position. And that did not change in the few moments Ezra/the world is talking about.

Finally, I don't care how informed you are...what zosima said.

Posted by: rglvr | May 7, 2010 8:20 AM | Report abuse

"Also, if 'working people with retirement savings' have every reason to be freaked out, then they shouldn't be investing in the stock market. If their temperament is to fear with Ezra and the rest of the commentariat every time the market drops a lot, then they are most likely speculating, as the value of a business is derived not from its stock price but from its underlying assets and long-term competitive position."

for several years, i worked in the portfolio analyisis department of a large brokerage firm, and i can tell you, that investors, large and small, "freaked out," when their portfolios would drop.
and this was not the market, "dropping a lot." this was a major drop.
the last two years have been a scenario that has freaked out investors, with even ironclad temperaments, who believe in long-term, dollar cost averaging.
people have been very skittish and freaked out in this economy.
and people with retirement savings that wish them to grow, still have to have some risk exposure, so most investors do find themselves, indirectly, affected by the vicissitudes in the stock market.

and the truth is,
losing money does freak people out.
it is tied in with their sense of security, plans for their future and their family, and often, for some, their whole sense of purpose.


Posted by: jkaren | May 7, 2010 8:53 AM | Report abuse

Like I said though, the value of the businesses people own aren't derived from the stock price. If you really know that, and follow your businesses' productive output on a long-term basis, then what people are currently paying for the same piece of a company you own shouldn't matter. Just because people right now are paying less than what you paid for your business doesn't mean you've lost money. It just means that people are paying less right now. You still own a piece of the business, right? What the company doing is more aligned to whether you're richer or poorer.

That a person's sense of security is tied to the current quotation for the piece of a business they own doesn't make any business sense. Say you owned a business that made and sold wingnuts, and every day someone came by and offered to buy your business. Each day the quote was different, but each day your business made and sold wingnuts. The value of your business is the ability to buy and sell wingnuts, not what the guy is willing to buy your business for that particular day. Oh, and the guy trying to buy your business is absolutely nuts sometimes.

Posted by: rglvr | May 7, 2010 9:27 AM | Report abuse

"Ezra did something worse--he became a business news cable channel for this one blog post and pretty much whipped up a whole lot of nothing."

Here's the thing: I hear about this in passing, am mildly curious and want to know what we know but don't have a ton of time to look into it, log into my RSS reader and see this quick post. It gave me a quick explanation of the known situation, which is exactly what I wanted. Link to McMegan aside, I appreciated that.

Posted by: slag | May 7, 2010 11:05 AM | Report abuse

"Ezra did something worse--he became a business news cable channel for this one blog post and pretty much whipped up a whole lot of nothing. And while the purpose of a blog might be to speculate on very current events, I prefer his longer pieces, not his cable news style updates. Look up news and commentary from 1987 or other crashes (not to mention, every single other day) and I bet it sounds as overly-concerned with a daily movement.

Also, if 'working people with retirement savings' have every reason to be freaked out, then they shouldn't be investing in the stock market. If their temperament is to fear with Ezra and the rest of the commentariat every time the market drops a lot, then they are most likely speculating, as the value of a business is derived not from its stock price but from its underlying assets and long-term competitive position. And that did not change in the few moments Ezra/the world is talking about."


Economists are deeply concerned about the situation inside the EU and the possible consequences for the global economy. Against that anxiety-inducing backdrop, we saw the biggest plunge within a single day session in the history of the Dow, with a bunch of perfectly sound companies' value dropping to a penny, and conflicting explanations of the reason for that event.

This was something different from ordinary volatility, and it would have been surprising if Ezra (or any other daily blogger) had not made note of it, despite the fact that it was too early to explain or analyze precisely what occurred. It was a mystery that people acoss America (and around the world) rightly wondered about, and talked about around their dinner tables yesterday evening.

The notion that working people shouldn't be investing in the stock market if they find a 1,000 point intra-session decline unnerving is unrealistic. In 2010, the management of many people's retirement is out of their hands, thanks to company pension funds, 401k's, etc.

I like Ezra's more analytical pieces best as well. I am also not a fan of Megan, although Ezra merely presented her piece as a round-up of theories that were going around in the hours after the plunge. The fact remains that the thousand point drop was a truly weird event, and it came at a time when events in Europe are giving the world a serious case of the jitters. It would not be correct to descibe yesterday's session as routine volatility about which no one should be at all "freaked out." A good blog always has a conversational quality, and the blowback here about Ezra's post makes little sense to me.

Posted by: Patrick_M | May 7, 2010 11:24 AM | Report abuse

The "quick explanation" was not very valuable, in my opinion. Felix Salmon posted before and ten minutes after Ezra with more substance, albeit the before post got into forecasting the future based on a few moments. More importantly, it wasn't a bunch of "No one knows. But everyone is freaked out", "return of financial crisis psychology, where people fear because they don't know", "drop too big to be uncertain", and "very, very fragile market" sensationalistic diagnoses.

Posted by: rglvr | May 7, 2010 11:25 AM | Report abuse

Regardless of the routineness of the size of movement in stock prices, if you're going to comment on how stock market participants are feeling and give the market characteristics like "fragile", at least talk about how Greece, fear, "fragile" markets, etc., will affect American businesses.

I guess what I'm against is giving market movements too much credit. The reasons and feelings given to those movements end being, more often than not, useless. Garbage in, garbage out, ya know?

Posted by: rglvr | May 7, 2010 11:58 AM | Report abuse

"I guess what I'm against is giving market movements too much credit. The reasons and feelings given to those movements end being, more often than not, useless. Garbage in, garbage out, ya know?"

I actually completely agree with you on this. I think the stock market coverage on the cable channels is extremely shallow and loaded with pompous blowhards offering manufactured explanations and prognostications that are just useless ephemera. And to his credit, Ezra does not suffer from the obsession to constantly "explain" to us mere mortals the "causes" for the daily fluctuations on the Dow.

I just think that yesterday's event was sufficiently bizarre that it deserves the head-scratching attention that it has received, and any description of the 2010 markets as "fragile" given the fact the economists see the recovery itself as still rather fragile, is not inappropriate.

My last thought: To me it is not satisfactory that we can't get a same day explanation from the NYSE about whether the plunge was caused by a "fat finger" from a single trader, or by a "perfect storm" of cascading computerized trades, or just temporary insanity among investors. One would think that the Exchange would be able to analyze the trading activity during those minutes and explain what did or did not happen during that extremely short dip and recovery, almost immediately.

Posted by: Patrick_M | May 7, 2010 1:14 PM | Report abuse

"albeit the before post got into forecasting the future based on a few moments. "

Funny you should mention that. I almost included the fact that Ezra didn't add any bogus forecasting or unwarranted speculation into my explanation of why I appreciated the post, but I figured that went without saying. I was wrong. So...another thing I appreciated about this post was that it didn't include any bogus forecasting or unwarranted speculation.

"More importantly, it wasn't a bunch of "No one knows. But everyone is freaked out", "return of financial crisis psychology, where people fear because they don't know", "drop too big to be uncertain", and "very, very fragile market" sensationalistic diagnoses."

I actually found the "drop was too big for the cause to be this uncertain" to be a little comforting. I read it as, "We don't know what caused it but it's obviously going to be looked into," which I'm all for. It's the opposite of the feeling I get when, after a giant oil spill, I read people saying stuff like "accidents happen". No matter how many qualifiers you put on that statement, it's hard to read as anything other than a declaration of acceptance and impotence. It'd be nice if more of us took other disasters as seriously as we take a one-day dip in the DOW, if not more so.

As to the rest of your criticism, It's probably valid. I guess I just filtered out the panic stuff since I didn't feel panicked after reading it. My main take away was "we don't know but we're looking into it". Although I could see why you'd object to some of the language.

Posted by: slag | May 7, 2010 1:39 PM | Report abuse

Points taken, P_M and slag.

I think the exchange is probably not as sophisticated as I'd hope, and with stocks moving via so many avenues (e.g., broker-dealer houses, intrabank pools of liquidity, prime brokerages, electronic networks) so quickly and in such massive volumes that figuring out where the chain of events that lead to the massive sell-off began is not a job I'd want at the NYSE.

Posted by: rglvr | May 7, 2010 4:13 PM | Report abuse

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