“It happened so quickly, it was like a torpedo,” says Scott Redler of the hedge fund T3 Capital Management. Last Thursday, the Dow Jones posted its worst intra-day fall on record, a 9.2%, or 998-point, drop before ending the day down 3.2%.
The slide included a near 600-point plunge in six minutes in the early afternoon. The S&P 500 had a similar fall, while Procter & Gamble, normally a stable blue-chip, fell by 35% in two minutes. Some stocks momentarily lost almost all their value.
What triggered the plunge isn’t clear, but the initial slide appears to have been “amplified… in the blink of an eye” by “rapid-fire computer trading”, says Rolfe Winkler on Breakingviews. Around 60% of trading is now done by computers that send buy and sell orders in milliseconds – so-called high-frequency trading (HFT).
Moreover, some major HFT firms appear to have withdrawn from the market as the extent of the slide threatened to overwhelm their computer models. That lowered overall liquidity and accelerated the fall. Nor did it help matters that while major exchanges automatically freeze trading to protect investors from bizarre price movements, other exchanges don’t. Computers seem to have shunted trades onto markets without so-called circuit breakers, thus exacerbating price declines.
Last week’s ‘flash crash’ highlights once again the “inherent and systemic risk of our automated stockmarket…with few checks and balances in place”, say Sal Arnuk and Joe Saluzzi of Themis Trading. So far, regulators have shown little interest in rectifying this, says Binyamin Appelbaum in The New York Times. But after the fuss over last week, that may now change.