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Q&A: What caused the market sell-off?

A Greek debt crisis fueling concerns of a credit crunch throughout Europe. A fragile economic recovery on the home front. Traders bracing for a big market pull back after the run-up this past year.

Wall Street was already poised for a big letdown.

Apparently all it took to push it over the edge Thursday was a few trader errors.

The result: The Dow Jones Industrial Average plummeted nearly 1,000 points before recovering two-thirds of its losses in one of the most stunning half hours in stock market history.

When the dust settled, the Dow wound up closing at 10,520, down 348 points, or 3.2 percent. The S&P 500 dropped 37.75 points, or 3.24 percent, to 1,128.15, and the Nasdaq was down 82.65 points, or 3.44 percent, to 2,319.64.

As shell-shocked investors approach today's action, here's a closer look at the latest Wall Street frenzy.

What caused the plunge?

Markets have been down for days amid growing fear that Greece's debt crisis will spread into broader financial problems throughout Europe. Financiers in Germany and elsewhere in Europe are already facing huge losses. A widening credit crunch could put a damper on global recovery.

The Dow was already in negative territory again Thursday, down more than 300 points, before apparent trading glitches turned a bad day much worse.

What were the trader errors?

It's wasn't exactly clear late Thursday.

There were reports that what is known in the business as a "fat-finger trade" — when a trader accidently typed an order for billions instead of millions — drove the price of Proctor & Gamble stock from about $60 to under $40, before it recovered. The wild ride for 3M's stock price also appeared to be the result of trader error.

The drop in those brand name Dow stocks was enough to trigger "sell" orders across the market. The Dow fell 600 points in seven minutes to a low of 9,869, before rebounding sharply.

Another company, the consulting firm Accenture, saw its shares momentarily plummet from above $40 to pennies before rebounding to close at $41.09, off 2.6 percent for the day. Nasdaq said later that it would void trades in which a stock moved more than 60 percent from its price at 2:40 p.m.

Why wasn't an error that large caught immediately?

That's under investigation. Some traders said they were stunned to see the sharply falling numbers and speculated that computers took over when electronically triggered sell points were reached.

NYSE spokesman Raymond Pellecchia said the plunge wasn't caused by a problem with the exchange's trading systems. The Nasdaq Stock Market said it was reviewing its trades with other trading networks.

NYSE chief operating officer Larry Leibowitz said all the major stock exchanges were holding a conference call with the Securities and Exchange Commission to discuss what happened.

Was the sell-off a record?

When the Dow was down 998 points shortly before 3 p.m., a 9 percent plunge, it marked the biggest intra-day loss since the Black Monday market crash of 1987, when the Dow dropped almost 23 percent.

In terms of market close, the 348 point loss wasn't even close to a record. The biggest one-day sell-off on a point basis occurred Sept. 29, 2008, when the Dow Jones Industrial Average closed down 777 points.

Are we seeing a market correction?

Time will tell, but this may be the start of a correction. The fluke of Thursday's freefall aside, the Dow still has lost 631 points, or 5.7 percent, in three days.

The market hasn't had a correction — defined as a selloff of 10 percent — for at least 14 months. Many market watchers have been predicting a sharp market pull-back, if not a correction, for months.

Which industry was hit the hardest?

The financial sector took the brunt of the damage, ending down 4.2 percent, its worst loss since Feb. 4.

Bank of America lost 7 percent and Citigroup 3.4 percent on heavy trading volume. Among regional banks, Fifth Third Bancorp, KeyCorp and Marshall & Ilsley all fell almost 7 percent.

What's happening in global markets so far today?

Asian stock markets plunged in opening trades today. Japan's benchmark Nikkei 225 stock average dropped 396.48 points, or 3.7 percent, to 10,299.21. South Korea's Kospi dropped 2.9 percent to 1,635.25, while Australia's benchmark lost 2.1 percent.

What do we watch for next?

Greece isn't alone in battling huge debt. Investors worry that the panic will envelop Portugal and, even more worrisome, Spain, one of the larger economies in Europe. There is concern that the proposed $146 billion bailout of Greece will hamper Europe's ability to help those other countries if they falter.

Closer to home: National unemployment figures are out today. They are expected to show the unemployment rate held steady at 9.7 percent. Recent job reports indicated employers are hiring more and laying off fewer, but not enough to offset a growing labor pool. A disappointing report could jar the markets even more.

Information from Times wires was used in this report. Jeff Harrington can be reached at jharrington@sptimes.com or (727) 893-8242.

How local companies fared

Aerosonic Corp. and SRI/Surgical Express were hardest hit, falling 10 percent and 9 percent, respectively. Close behind was retailer HSN, down 8 percent.

Among other bay area stocks: MarineMax closed down 6 percent; Odyssey Marine down 6 percent; Raymond James Financial down 4 percent; Jabil Circuit down 5 percent; WellCare Health Plans, down 5 percent; Tech Data, down 4 percent; Nicholas Financial down 4 percent; and Teco Energy, down 4 percent.

Q&A: What caused the market sell-off? 05/06/10 [Last modified: Friday, May 7, 2010 9:43am]

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