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What caused the stock market's wild swing?

Here are questions and (some) answers regarding what's known about the stock market's 20-minute, 600-plus-point roller-coaster ride on Thursday. The Dow closed down again on Friday.

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What else might have caused the free-fall?

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It's not clear yet. Theories range from cyberterrorism (someone hacked into the computers and placed fake trades) to suspicions that electronic trading got out of hand. In electronic trading, stock traders try to use computers to execute trades quickly, perhaps seeking to make a profit on small changes.

According to the Simon Graduate School of Business in Rochester, N.Y., there was a rapid-fire, two-minute selloff of 16 billion futures contracts tied to the Standard & Poor’s 500 stock index, known as E-mini S&P 500 futures.

Not the case, says the CME Group, which oversees the exchanges where the E-mini is traded. “All our markets operated properly. There was no issue with the S&P futures contracts, and there was not any unusual activity,” says Michael Shore, a spokesman for the CME Group in Chicago.

Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Ore., wonders if the steep downdraft was the result of a “cascade” effect. For example, the market on Thursday was having a bad day trying to absorb the implications of a sharp drop in the value of the euro. On the NYSE, specialists had started to institute “shock absorbers,” whereby they tried to slow trading by instituting an auction process. However, it’s possible the slower markets drove some of the traders into the electronic markets, which have much less liquidity, says Mr. Dickson.

“All of a sudden there were all sellers and no buyers,” he reasons. “We may be seeing the penalty for not having any human intervention to slow things down and get it back to an orderly marketplace.”

Are there implications from the day?

The wild ride indicates that the trading system failed, says John Broussard, an associate professor of finance at Rutgers University's School of Business in Camden, N.J. “There was a system failure somewhere," he says, "and I’m not sure where it was.”

It’s imperative that the exchanges restore confidence in their integrity, says Dickson. Moreover, Congress should hold hearings to determine what happened, he says. He anticipates that the financial regulatory reform legislation currently being debated in Congress may incorporate some changes to protect investors from extreme days in the markets. He adds, “The legal ramifications are off the charts.”