Dow average sees biggest fall in 15 months
The 376-point plunge in the Dow average Thursday was big, but the flash crash was bigger. Can the SEC keep it from happening again?
Talk about volatility!
The Dow Jones Industrial Average closed down 376 points Thursday, its biggest point drop in 15 months and 13th triple-digit swing in the last 18 trading days.
But all that's a kiddie slide compared with the missile-like plunge of the markets two weeks ago, when for a few minutes some stocks fell to a penny a share while Apple or Hewlett-Packard went, briefly, for $100,000 a share.
That's a return of $99,755, or 40,500 percent, on Apple stock; an even better 206,800 percent return on HP.
Those were great trades, or would have been, had the exchanges not nullified them and the most extreme transactions during the May 6 so-called flash crash, which took the Dow average down nearly 1,000 points. The Dow quickly recovered most of that ground, losing 347 points for the day. That was the biggest loss in 15 months until Thursday's even bigger debacle.
To avoid a recurrence of the May 6 crash, the Securities and Exchange Commission is proposing a five-minute pause in trading when the price of a stock in the Standard & Poors 500 index moves more than 10 percent during the preceding five minutes. The pause would take effect in all markets, not just the biggest ones. And it would kick in when prices go up as well as when they go down.
"The events of last week are unacceptable," SEC Chairman Mary Schapiro told a Senate subcommittee Thursday. "The pause would give the markets the opportunity to attract additional liquidity in the stock, establish a reasonable market price, and resume trading in a fair and orderly fashion."
The SEC still hasn't figured out what triggered the flash crash. But it is focusing on possible linkages between trading in index futures and the performance of individual stocks, liquidity mismatches, various types of market orders, and the effects on exchange-traded funds or ETFs.
Of all the trades canceled by the exchanges, about 70 percent were ETFs, Ms. Schapiro said. "The SEC has received numerous complaints from investors, for example, who used stop loss orders to protect them from rapidly declining markets. It appears that some investors' accounts were liquidated as share prices plummeted only to have stock prices close significantly above their sale prices."
"If we identify any activity that violates the securities laws, we will take appropriate action," she added.
None of these actions, however, are likely to calm the markets in the short term, which have been roiled by worries of turmoil in Europe, a potential slowdown in China, and mixed signals on the US economy.
"There's just a lot of fear out there," says John Horcher, executive with First Coverage, a Boston-based information-filtering service for portfolio managers. "People are focusing on the bad news again. That, to me, says there will be more volatility" in the days to come.