Monday, June 7, 2010

"Flash Crash"

Pathways Advisory Group, Inc.
Dustin Smith, CFP®

You’re at the mall and suddenly a few hundred people are running from something…. Do you join them? Or do you first ask questions? I think I would ask questions later... At the very least, a little exercise won’t hurt. Would you sell a stock just because a few thousand others did? That would be the instinctive reaction. They must know something…

After about 14 months of a climbing market, fear came rushing back on May 6th. The May 6th “Flash Crash” still lacks definitive explanation. Although no-one seems to know exactly what happened during a wild 20 minutes or so, the main source was news about economic troubles in Greece.

Fears about Greece were enhanced by a nationwide strike and live video feeds (during trading) of riots in Athens. Concerns arose about a potential contagion effect on the rest of the European Union. US markets were down about 3% before dropping to nearly 9%... in 20 minutes. However, markets recovered to end trading back near the 3% (S&P 500) loss. Yep, only 3%. That sure wasn’t the headline, was it?

Within a few days, markets recovered most of their losses. Nevertheless, what a strange day May 6th was. Stories of a “fat-fingered” trade appear to be rumors. Nobody seems to know exactly what happened. After markets closed, about 450 NASDAQ and NYSE Arca (an electronic exchange owned by NYSE) trades were cancelled. The SEC announced an investigation shortly thereafter.

There has since been some discussion of additional “circuit breakers” (a halt to trading for a period of time after a quick drop) but for the most part the market sorted it out. Again, what a strange day May 6th was. It all started because of an economic mess in Greece. (Let’s throw a little Greece on the fire!) Although the Greek issues have justifiably led to concerns about other European nations and the “Euro”, it’s pretty amazing that a country with a Gross Domestic Product (GDP) comparable to the state of Georgia (the 10th or 11th largest State GDP in the United States) can cause such a ripple.

For long-term investors, it was just noise. Same old, same old. For day traders, it was a nightmare. For market procedures, it was a test. Hopefully most of you heard about it days or weeks later. I am just thankful I wasn’t on the floor of the New York Stock Exchange in the middle of the thundering herd…

No comments: