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Market's chaotic slide spawns one major question: What caused it?

How bad was it at financial markets this week? One look at this trader at the New York Stock Exchange on Friday should provide a clue. After Thursday’s perilous plunge, the Dow Jones closed down nearly 140 points Friday and 600 points for the week.

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How bad was it at financial markets this week? One look at this trader at the New York Stock Exchange on Friday should provide a clue. After Thursday’s perilous plunge, the Dow Jones closed down nearly 140 points Friday and 600 points for the week.

NEW YORK — Regulators and Wall Street officials went through millions of trades one by one Friday and canceled thousands as they sought to explain a record plunge in the stock market, undo damage and keep it from happening again.

It wasn't clear how long the laborious process would take or if it would even solve the mystery behind Thursday's harrowing trading session that saw the Dow Jones Industrial Average fall nearly 1,000 points before recovering. The chaotic slide — some stocks briefly fell to near zero — brought back memories of the darkest days of the financial crisis.

The Securities and Exchange Commission and the Commodity Futures Trading Commission were investigating, but on the day after, there were more questions than answers:

• Did a single trader mistakenly punch in the wrong number of shares when making a sell order, maybe mistakenly typing "billion" instead of "million" and setting off a marketwide panic?

• Did high-speed computerized trading systems that are supposed to make markets work smoothly go haywire, sending stocks into a nosedive?

• Most important to anyone with money in the stock market: Could it happen again?

Maybe the scariest part was that no one could unravel what happened. That left executives at the major stock exchanges pointing fingers at one another, and the public wondering if the hidden world of high-frequency, computerized trading that fed the panic posed a threat to their 401(k)s.

"It could be a while before they figure it out, because they have to sift through everything trade by trade," said San Diego State University finance professor Dan Seiver, who has followed the markets for 52 years. "And humans are a lot slower than machines."

Market officials worked to cancel thousands of "clearly erroneous" trades made during the plunge.

Thursday's trading was enough to stir fear among even the most seasoned market veterans.

The Dow had already fallen nearly 400 points by about 2:40 p.m. Yet the damage only got worse. The Dow tumbled 600 points in seven minutes, giving it a record one-day loss of 998.50, or 9.2 percent. Minutes later, the index inexplicably turned up again, erasing most of the losses.

Among the hardest hit: Procter & Gamble and 3M, whose stocks are among the highest priced of the 30 stocks in the Dow. Their big drops took the Dow down sharply because it is price-weighted — a $1 drop has the same impact whether the price started at $100 or $2.

At 2:42 p.m. Thursday, P&G was trading at $61.73. Within seven minutes, it fell 36 percent. That drop alone accounted for 169 of the nearly 500 points that the Dow lost during the same time.

How did it happen? Speculation on trading floors initially centered on a computerized selloff possibly caused by a typographical error. One theory was that a trader trying to sell millions of shares accidentally sold billions, a move that would have triggered a wave of automatic selling.

The SEC is poring through trading data containing millions of transactions to try to identify what might have caused the disruption, according to two people familiar with the matter.

The New York Stock Exchange and Nasdaq were also examining audits of completed trades, according to the people, who spoke on condition of anonymity because the investigation is ongoing.

On Capitol Hill Friday, Sens. Ted Kaufman, D-Del., and Mark Warner, D-Va., called for the SEC and the Commodity Futures Trading Commission to conduct a thorough study of high-frequency trading and other tools that move markets in milliseconds.

"We saw a living, breathing, real-time example today of the potential catastrophe that takes place if we don't have an ability to make sure we adequately use this technology," Warner said late Thursday.

Market's chaotic slide spawns one major question: What caused it? 05/07/10 [Last modified: Friday, May 7, 2010 9:09pm]
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