17

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?

1
  • I'm sure you already know the answer to this after more than a year, but check out my answer below for the up to date version. :)
    – Flats
    Dec 10, 2021 at 14:04

5 Answers 5

28

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. :-)

1
4

It has been a very long time since this question has been touched, but doing some digging on some of the provided Wikipedia links, it seems that there is a clearer answer in this page on the 2010 Flash Crash, specifically here.

In April 2015, Navinder Singh Sarao, a London-based point-and-click trader, was arrested for his alleged role in the flash crash. According to criminal charges brought by the United States Department of Justice, Sarao allegedly used an automated program to generate large sell orders, pushing down prices, which he then cancelled to buy at the lower market prices. The Commodity Futures Trading Commission filed civil charges against Sarao. In August 2015, Sarao was released on a £50,000 bail with a full extradition hearing scheduled for September with the US Department of Justice. Sarao and his company, Nav Sarao Futures Limited, allegedly made more than $40 million in profit from trading from 2009 to 2015.

...

In January 2020, Sarao was given a sentence of only one year of home confinement, with no jail time. The sentence was relatively lenient, as a result of prosecutors' emphasis on how much Sarao had cooperated with them, and that he was not motivated by greed.

A long overdue answer to a question that piqued my curiosity. And credit where credit is due for the answer from @myron-semack. You should have waited to give up until 10 years later ;)

3

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 :-)

2

Trading error at Citi

6
  • 2
    So the automated trading software went Skynet on us?
    – MrChrister
    May 6, 2010 at 22:57
  • 3
    @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, 2010 at 16:10
  • 1
    @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, 2010 at 17:44
  • 1
    Is there a citation?
    – ripper234
    May 8, 2010 at 4:59
  • this was disproved. Aug 31, 2012 at 3:42
2

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/

2
  • this was disproved. Aug 31, 2012 at 3:43
  • still disproved. recommend deletion. Jan 25, 2013 at 3:27

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.