Wow! The Fat Finger Story
May 6, 2010
Posted by Jody Eisenman | Filed under Uncategorized
After my comments yesterday, I was not surprised by the continued selloff. However, in over 25 years of working on Wall Street, I have never seen a day like today. See Chart:http://www.google.com/finance?q=INDEXDJX:.DJI
The Dow plunged about 700 points in an incredible 15 minutes. It then proceeded to recover 500 points in another 20 minutes. After touching 10,000, we finally rallied back to close at 10,520, a loss of “only” 347 points. What happened? Well, the original trigger was and continues to be the debt crisis in Greece. Greece has roughly $400BB in outstanding debt. As rates keep on rising, their debt service (meaning the interest they pay of these bonds is increasing). As such, the day of reckoning is rapidly approaching. In order to stay solvent, they must accept a bailout from the International Monetary Fund (IMF) and the European Union (EU), which is looking increasingly likely. However, the lenders are demanding an austerity program to ensure that expenses are cut. Predictably, the bill was accompanied by riots in the streets of Athens. Many economists are frightened that these debt issues could spread to Italy, Ireland, Portugal and Spain.
While all this was going on, the futures began to plunge and the stock market went with it. The rumor is that some trader at Citi meant to enter an order for 15 million, and hit the wrong key and made it 15 billion. The matter is currently under investigation, and Citi denies that it happened. There were also rumors that a large hedge fund collapsed. However, what is unquestionable is that as we move more and more toward electronic trading and remove human involvement, there is no one to question any orders, or to “slow down” the process. As such, the trades were executed at insane prices. To give you an idea of what that means, CTL opened today at 34.48, closed at 33.52, yet traded down inter day to 11.16. PG (Proctor and Gamble) lost $25 at one point on no news. Accenture (ACL) closed over $40, yet traded as low as a penny! For that matter, so did G and CNP! There are going to be a lot of very unhappy investors tomorrow morning. The VIX exploded over 40 at one point and finally closed at 32.80.
There is no question that the overall volatility in the markets has increased dramatically. I’m pretty confident in stating that unless some changes are made, this could very easily happen again. I am actually looking for buying opportunities here, but for the average investor, I would remain very cautious until the action returns to normal (whatever that means!) I expect the volatility to continue in the near term.
