Dow Drops Nearly 1,000 Before Rebound; Possible Bad Trades Probed

Peter A. McKay
The Wall Street Journal
5/6/2010

Stocks plummeted in a flashback to the panicked trading of 2008. Selling accelerated late in the day due to a wave of automated sell orders that turned an ugly drop into full-blown market washout.

At its afternoon low the Dow Jones Industrial Average was down almost 1,000 points, hurt by sharp drops in Procter & Gamble, 3M and other companies that traders said were subject to heavy selling by so-called black boxes, or automated trading systems.

The Dow recovered much of that loss but still ended with its worst one-day drop since February 2009, off 347.80 points, or 3.2%, at 10520.32. All 30 of its components slid, led by a 7.1% decline in Bank of America.

Shares of Procter & Gamble plunged to $39.37 from around $60. The New York Stock Exchange said each stock has its own circuit breaker level. When these stocks fall below their levels, then they can be traded on any other exchange or platform at any price. When P&G fell below its circuit breaker, a bid came in for the stock at $39.37 from the Nasdaq, the NYSE said.

“You don’t see a blue-chip stock like this go down 20 points with no news,” said Frank Ingarra, co-portfolio manager at Hennessy Funds, a quantitative firm that deals with program traders. “All of the algorithms kicked in from this errant thing.” …

…”Whenever the market moves up or down like the swings we saw today, we take a look to make sure everything’s operating properly. That’s exactly what we’re doing now,” Mr. Schoenberg said. “If the exchange finds anything amiss, it would report its finding on its website.”

Traders also also noticed errant trades among exchange-traded funds, including the iShares Russell 1000 Value Index Fund, which dropped from close to $60.00 to 7.5 cents.

“These ETFs traded to lows that are not mathematically correct,” he said…

The complete article is at WSJ.

Updated 9:51 pm 5/6/2010
Read also “Dow Drops 998 Before Halving Losses” at FoxBusiness.com

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