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Today (5/6/2010) the market dropped almost 900 points in less than an hour. I don't see any news story that explains the drop. Am I missing something obvious?

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No one is quite sure what happened (yet). Speculation includes:

  • Automatic trades gone wild
  • Typo by a trader (Rumor is that a trader at Citigroup hit "B" for Billion instead of "M" for Million)
  • Straight up computer glitch

The interesting thing is that Procter & Gamble stock got hammered, as did Accenture. Both of which are fairly stable companies, that didn't make any major announcements, and aren't really connected to the current financial instability in Greece. So, there is no reason for there stock prices to have gone crazy like that. This points to some kind of screw up, and not a regular market force.

Apparently, the trades involved in this event are going to be canceled.

Edit #1:

One thing that can contribute to an event like this is automatic selling triggered by stop loss orders. Say someone at Citi makes a mistake and sells too much of a stock. That drives the stock price below a certain threshold. Computers that were pre-programmed to sell at that point start doing their job. Now the price goes even lower. More stop-loss orders get triggered. Things start to snowball. Since it's all done by computer these days something like this can happen in seconds. All the humans are left scratching their heads.

(No idea if that's what actually happened.)

Edit #2:

IEEE Spectrum has a pretty concise article on the topic. It also includes some links to follow.

Edit #3 (05/14/2010):

Reuters is now reporting that a trader at Waddell & Reed triggered all of this, but not through any wrongdoing.

Edit #4 (05/18/2010):

Waddell & Reed claims they didn't do it. The House Financial Services Subcommittee investigated, but they couldn't find a "smoking gun". I think at this point, people have pretty much given up trying to figure out what happened.

Edit #5 (07/14/2010):

The SEC still has no idea. I'm giving up. :-)

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I hate attributing an event like this to a single cause. That implies that the market is an orderly system where everything operates smoothly. I prefer to see it as much chaotic.

When I see a drop like that happen, I'd say that there were a lot of sellers of stocks and all the buyers were bidding less and less for those few minutes. Perhaps the catalyst for that was a typo or a strange order. But in the end all the participants in the market responded by bidding down stocks, not just one person. It takes sides to complete a trade.

I know my model is a bit simplistic... I'd be happy if someone corrected me :-)

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Trading error at Citi

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    So the automated trading software went Skynet on us? – MrChrister May 6 '10 at 22:57
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    @MrChrister: Apparently the PCs at citi didn't have a popup that said 'Are you sure you want to sell 16billion?' and someone sold 16 billion instead of 16 million. At least that was the initial theory. Of course Citi is denying everything. @Chris: Hey thanks! – MoneyCone May 7 '10 at 16:10
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    @MoneyCone - Excel 2007 would pop up the paperclip say "Looks like you are trying to scare the ever living crap out of the market. Do you want some help?" – MrChrister May 7 '10 at 17:44
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    Is there a citation? – ripper234 May 8 '10 at 4:59
  • this was disproved. – antony.trupe Aug 31 '12 at 3:42
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Part of it was an Oops, but not all of it.

There were reports that the sudden drop was caused by a trader who mistyped an order to sell a large block of stock. The drop in that stock's price was enough to trigger "sell" orders across the market.

Source: http://www.msnbc.msn.com/id/36983596/ns/business-stocks_and_economy/

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  • this was disproved. – antony.trupe Aug 31 '12 at 3:43
  • still disproved. recommend deletion. – antony.trupe Jan 25 '13 at 3:27

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