Geez guys! I do ONE post about selling in May and you go and crash the market? I knew I was influential but this is ridiculous.
Okay, so maybe I wasn’t the cause of this event. But what did happen yesterday? If you haven’t heard yet or don’t understand the chart, sometime after 2:30 yesterday a massive selloff occurred in the market. The level of selling the happened is a once in a decade kind of stock market crash. The Dow Jones Industrial average lost almost 1000 points in a matter of minutes. Fortunately, the market actually bounced back and instead of it being an absolute disaster, the market simply ended as a very bad day.
So what happened? Details were still fuzzy last night as of this writing, but it looks like the event will become known as the fat finger event. A trader at Citi entered an order to sell 15 million shares of a security (not an outrageous amount), but accidental typed billion. Traders all over the globe saw the huge sell order and followed suit assuming Citi knew something. A massive selloff ensued. Part of the issue is because a lot of sophisticated traders use stop-loss order to limit themselves from losing too much in a massive selloff. Say I owned stock in Google and wanted to protect myself from losing too much money if the stock lost value. Earlier this week Google was trading around $530. So maybe I decided if the price dropped to $500 I’d sell my position. When the massive selloff occurred Google dropped to $500 so my stop loss order was triggered. All over the world millions of stop-loss orders like this were triggered so the market was flooded with sell orders and the price of everything tanked. Though it was fantasy trading, I had quite a few stop loss orders triggered as well.
In the high paced world of trading, with lightning fast computers, and herd mentalities, in a matter of minutes almost 10% of the value of the US stock market was wiped out. This 2.5 minute video shows how quickly it happened, and makes Jim Cramer look like the savior of the market. He literally calls the selloff ridiculous, and then people just started buying.
There are some issues that will need to get cleared up tomorrow. The NASDAQ exchange and NYSE has said they are going to invalidate some sales that happened at outlandish prices, which they have a right to do. Citi will likely have to issue some kind of statement providing more details of what happened. The dude that made the mistake has likely already been removed from the existence of this planet. I hope his name is Freddy. People will call him Freddy Fat Fingers.
But all is not well in the world of Wall Street. The market was already having a bad day due to worries about Greece, financial reform, and the oil in the gulf. Those are all realities that are still happening. The economy is still on a rocky recovery, and 10% of the population is still unemployed. The market could very well head further south, and I half expect it to for the next few days.
This was one hell of a ride, the stocks app on my iPhone froze as I followed the chart south. Google and Yahoo! finance pages crashed, and the world collectively held its breath for a few minutes. Behavioral finance researchers just got a wealth of new events to study, they should probably start with the massive influence I had with my post from yesterday.