I have conducted an unscientific poll, and I’m sorry to report that by this time tomorrow the vast majority of Americans will have lost all confidence in stock markets all over again.
Any good pollster reveals her methodology, and the exact phrasing of the questions asked. My poll was conducted by reading a couple of articles about the truly absurd fluctuations in the stock market yesterday afternoon, and then asking myself: “Once Americans read and hear about this stuff, will anyone in his right mind have any confidence in stock markets for a long time to come?”
A bad day in the stock market turned into one of the most terrifying moments in Wall Street history on Thursday with a brief 1,000-point plunge that recalled the panic of 2008.
It lasted just 16 minutes but left Wall Street experts and ordinary investors alike struggling to come to grips with what had happened — and fearful of where the markets might go from here.
[...]
Traders and Washington policy makers struggled to keep up as the Dow Jones industrial average fell 1,000 points shortly after 2:30 p.m. and then mostly rebounded in a matter of minutes. For a moment, the sell-off seemed to overwhelm computer and human systems alike, and some traders began referring grimly to the day as “Black Thursday.”But in the end, Thursday was not as black as it had seemed. After briefly sinking below 10,000, the Dow ended down 347.80, or 3.2 percent, at 10,520.32. The Standard & Poor’s 500-stock index dropped 37.75 points, or 3.24 percent, to close at 1,128.15, and the Nasdaq was down 82.65 points, or 3.44 percent, at 2,319.64.
How bad was it? Totally stark-raving-bizarro-mad bad:
Philip Morris International Inc. of New York … sank as much as 96 percent to $2 …
[...]
Accenture, the second-biggest technology consulting company, fell more than 99 percent to a penny. All trades executed below $17.74 have been canceled, Bloomberg data showed. The stock closed down 2.6 percent at $41.09.Exelon, the Chicago-based utility company, plummeted to a hundredth of a penny before closing down 4.2 percent at $41.86.
I think “plummeted to a hundredth of a penny” says it all. Welcome to the brave new world of the micro-penny stock. You’ve heard of investments that return pennies on the dollar. Yesterday, the whiz kids and rocket scientists who rule our stock markets gave us a stock worth a penny on the penny.
Wall Street already was jumpy over the Greek debt crisis that threatens to bog down Europe and the economic recovery in the United States. But some other catalyst seemed necessary to cause the jarring drop, which occurred mostly between 1:40 and 2 p.m., Chicago time.
Sources said a massively wrong trade in Procter & Gamble Inc., maybe with a trader entering an order for “billion” instead of “million,” caused the panic.
The accusing finger that points, and having pointed moves on, is currently aimed directly at Citigroup. Citigroup denies that it was responsible for such a trade:
Citigroup Inc. may have been the firm that made an erroneous trade, CNBC said, citing “multiple sources.” New York-based Citigroup said it found “no evidence” of erroneous trades…
That was the spark. Why did it lead to such a huge explosion?
No less an authority than the chief operating officer of the company that owns the New York Stock Exchange says that the reason why that one “massively wrong trade” precipitated a 16-minute meltdown is that our stock market, the way it operates today, is essentially a crappy market with no liquidity when it counts:
Larry Leibowitz, chief operating officer of NYSE Euronext Inc., owner of the New York Stock Exchange, told Bloomberg Television that computerized trades turned an orderly market into a rout. “You had some very high-cap stocks trading down 50 percent or large percentages in a split instant because there really was no liquidity in electronic markets,” he said.
Also doing his bit to shore up confidence in our stock markets is the CEO of the NYSE:
Duncan Niederauer, CEO at NYSE said, “This is the market structure we have all signed up for in the US and so we will have to accept that things like this are going to happen in periods of exacerbate (sic) volatility. It doesn’t take much volume to move some of these stocks a lot.”
He’s talking of stocks like Procter & Gamble and Philip Morris. Procter & Gamble, mind you, is a component of the Dow Jones Industrial Average. These are the stocks that are supposed to be among the most liquid in the market. It is supposed to take a hell of a lot of volume to move these stocks a little. (In other words, Niederauer’s statement is a flat-out baldfaced lie. He should probably leave podium spin to professionals whose lies are much more nuanced and elaborate, and rise well above the flat-out bald-faced level.)
So I checked the other 39 stocks in the DJIA to see how many, at their lowest point yesterday, dropped more than 15% below their opening price. (Most of the stocks showed declines of roughly 10%, pretty much in line with the overall market.) There were only three:
• 3M Co (MMM) fell 21.0% to $67.98 from the opening price of $86.06.
• Hewlett-Packard (HPQ) fell 17.0% to $41.94 from the opening price of $50.53.
• General Electric (GE) fell 15.8% to $15.15 from the opening price of $18.
By and large, stocks in the DJIA did not display the really outlandish price drops that some other stocks did. And this only underlines Niederauer’s lie.
Switching gears slightly, I’m really not sure what to make of Nasdaq’s announcement that some of yesterday’s horribly mispriced trades will be canceled:
Nasdaq OMX Group Inc. said it will cancel trades of 286 securities that fell or rose more than 60 percent from their prices at 2:40 p.m. New York time, just before U.S. equities plummeted.
[…]
Nasdaq, which investigated trades between 2:40 p.m. and 3 p.m., said it didn’t find any technology or system issues that caused declines of as much as 99.9 percent in some shares.
I think this is misconceived, for two reasons. One, there’s the issue of fairness. If you sold after the stock had dropped 61%, you’re protected, but if you happened to sell when it was just 59% down, tough cheese? Also, what about the guys who stepped in to help restore the market to sanity by buying when others around them were exacerbating the panic by selling? You bail out the sellers only at the expense of stiffing the buyers. Two, there’s the issue of what happens the next time the market goes into this kind of temporary tailspin. This kind of buyer-stiffing seller bailout has the effect of weakening the market’s self-correcting mechanism. Traders are less likely to step in and buy, which just allows the forces of panic to gain even more momentum, which makes it that much harder to dissipate the forces of panic.
By the way, by far the stupidest statement I read about yesterday’s market meltdown came from the NYT‘s Floyd Norris:
Combine one part nervous traders, one part Greek crisis and one part trader error. Stir in one part central bank complacency. Bring to boil. Panic.
Hey, dude, when you try to write a recipe it’s important to get the proportions right. Nervous traders, the Greek crisis and trader error certainly didn’t play equal roles in what happened yesterday. But he gets the prize because of that incomprehensible “one part central bank complacency”. What the eff did central bank complacency have to do with it?