CLEARWATER — Early on the afternoon of May 6, the financial world watched in horror as the Dow Jones Industrial Average plunged more than 600 points in five minutes.
At the same time, Wesley "Skip" Shepherd's stock in Philip Morris International was plummeting from $48.58 a share to $28.68.
Within a few harrowing minutes, the market recovered and Philip Morris bounced back to $47. But it was too late for Shepherd. The sudden price drop had triggered an automatic sell order and his shares sold for $42.35 — $8 a share less than what he paid for them and far less than they are worth now.
The market's wild ride that day quickly became known as the "flash crash." And as federal regulators tried to figure out what caused it, Shepherd, a 67-year-old seasonal Clearwater resident, began filling a three-ring binder with complaints to his brokerage firm, the Securities and Exchange Commission and anyone else he could think of.
It only seemed right, he argued, that his unwanted trade should have been canceled just as others were. Or, alternatively, that he should be made whole for losses that clearly stemmed from a glitch in the nation's equities trading system.
Because of the crash, the SEC is testing new rules for canceling trades made during crazy price swings like those on May 6. The agency admits that canceling some, but not all, of the trades made that day stemmed from "a process that was not transparent to market participants."
Or, as Shepherd puts it:
"If you were a little guy, you got screwed."
Caught in the swing
Hale and hearty, Shepherd is a master captain who used to teach neophyte yacht owners how to operate their craft. Since the economy sank, taking the yacht business with it, Shepherd has increasingly lived off his stock holdings.
Late last year, he paid $50.59 a share for 50 shares of Philip Morris International.
"I'm not a smoker, but the rest of the world is, and Philip Morris is a good company," he says. He liked the hefty dividends — enough to pay the maintenance fees on the Island Way condo where he and his wife, Rosalie, an artist, spend the winter.
To protect his investment, Shepherd set a ''stop-limit" figure of $42, the lowest Philip Morris had sold for in a 52-week period. That meant Shepherd's shares would automatically sell if the price dropped that far.
But the price was cruising close to $50 until May 6.
It was a turbulent day from the start, with the U.S. stock market opening down on worries about the debt crisis in Greece. Then, between 2:42 p.m. and 2:47 p.m., the Dow plunged more than 600 points, climaxing a record one-day drop of nearly 1,000 points before the market abruptly turned around.
Shepherd wasn't monitoring his stock portfolio that afternoon and was oblivious to the turmoil. So he was shocked when he got a notice a few days later that his Philip Morris shares had been sold.
"I called my broker and said, 'Hey, what's this about? I didn't want to sell,' " Shepherd says. That's when he learned that his stop-limit order had kicked in during the crash.
At Shepherd's request, his broker at Morgan Stanley Smith Barney sent him a three-month trading history on Philip Morris. One thing caught Shepherd's eye: Almost 16 million of the company's shares had traded on May 6 — nearly twice the usual volume.
"Somebody made a lot of money that day" snapping up shares when they briefly plunged in price, Shepherd says. Peeved by his own losses, he wrote to Morgan Stanley.
"I find it hard to believe that this stock dropped that fast and rebounded in about 50 minutes. I feel that I should be reimbursed for this loss and be given an explanation as to why it occurred. There were approximately 16 million shares traded that day. Is that anywhere near normal?"
He also contacted Philip Morris. In a July 21 e-mail, the company confirmed that trading in its shares on May 6 had been "unprecedented." It wished him luck.
In late August, Shepherd finally got a response from Morgan Stanley.
It noted that the New York Stock Exchange and other exchanges had decided to cancel only those May 6 trades in which a stock's price dropped more than 60 percent during the flash crash. Philip Morris shares dropped 41 percent.
"While we regret that your account was affected by the extraordinary market activity on May 6, our review does not indicate that this was due to any error or wrongful action or inaction on the part of (Morgan Stanley) or its employees. Therefore, we respectfully declined your request for remedial action."
"It was less than $1,000 I was asking for," Shepherd says. "These guys have a $1,000 in their wallets."
(Asked for comment for this story, the brokerage firm only repeated what was in the letter.)
Undeterred, Shepherd turned to the SEC.
"I'm just a little guy trying to save money. I feel that this ERRONEOUS TRADE was caused by a flaw in your system. To my knowledge there has not been a satisfactory explanation to the public as to the cause. Good reason (that) people like myself will lose all faith in the market."
On Oct. 5, Shepherd got an e-mail from the SEC's Office of Investor Education and Advocacy. It linked to a website where he could find a preliminary report on causes of the flash crash.
Shepherd e-mailed back:
"I found that interesting. But that didn't answer my main question, and that was, How am I to be made whole again after this error happened?"
There was no more word from the SEC.
Shepherd made one last stab. He appealed for help from Richard Blumenthal, attorney general of his native Connecticut and a forceful consumer advocate. But Blumenthal was busy running for U.S. Senate (he won) and never responded.
'Circuit breakers' test
More than six months after the flash crash, Shepherd has yet to receive any redress. With Philip Morris now at $58 per share, he figures he's out just under $1,000 from his unwanted sale.
One expert says stop-limit orders are a common way for investors to hedge against a steep drop in share prices.
"It's just investment protection," says Joe Saluzzi, an equity trading expert and co-founder of Themis Trading in New Jersey. "He was penalized for doing something prudent."
On May 6, Saluzzi says, there would have been "tons" of other investors with sell orders that kicked in as prices plunged during the flash crash.
But most, like Shepherd, were out of luck because only those trades in which shares dropped more than 60 percent were canceled — just 21,000 trades out of the millions made that day, the SEC's chairwoman told Congress.
In a 104-page report issued in September, the agency attributed the crash to a large trader's use of a computerized trading system to sell futures contracts. That led to rapid selling that triggered additional selloffs in an already unstable market.
In a pilot program that runs through Friday, the SEC is testing "circuit breakers'' that would activate when share prices change by 10 percent in five minutes. It is also testing new rules that clarify the process for canceling erroneous trades. The rules apply to all 50 exchanges on which stocks are traded, not just the NYSE and NASDAQ.
"What was exposed on May 6 was that everybody had their own rules as to how to handle a volatile market," says Michael Pagano, a professor at Villanova University's school of business. "What the SEC did was put circuit breakers in place to put everybody on the same playing field, so that if something does go wrong you stop the market for five minutes."
Saluzzi, though, says the new rules are "Band-Aids" that don't address the real problem — an extremely fragmented market system that caters to high-frequency traders.
"We've been in business a long time and we struggle sometimes to understand what the next move by these guys is going to be," Saluzzi says. "How is a retail investor supposed to understand how the market works?"
Since May 6, what Saluzzi calls "mom-and-pop investors" have pulled $80 billion out of U.S. mutual funds, indicating "a loss of confidence in the market that won't be regained overnight," he says.
As for Shepherd, he's still in the stock market. But because his marine consulting business is slow, he mourns his Philip Morris losses.
"It was less than $1,000, but $1,000 has become more significant than it was three years ago. I don't want any excess money. All I want to do is be made whole. I ain't trying to toast anybody, but the big guys are hanging us out to dry again."
Susan Taylor Martin can be reached at firstname.lastname@example.org.