5 Lessons of the 1,000-Point Dow Dive

Human error seems to have set off a "cascade" of automated trades

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When the Dow Jones Industrial average dropped almost 1,000 points Thursday afternoon, then climbed much of the way back up again before trading closed, it sent pundits into as much of a swirl as the market itself. The drop wasn't caused by the turmoil in Greece but, in large part, by apparent trader error. Now that a few hours have passed, experts and observers have taken a step back to ask what we can learn from the wild Dow swing.

  • The Dangers of Our High-Tech, Automated Trading System  The New York Times' Nelson Schwartz and Louise Story write, "The glitch that sent markets tumbling Thursday was years in the making, driven by the rise of computers that transformed stock trading more in the last 20 years than in the previous 200." They cite a "jolt" in unexplained selling that "apparently set off trading based on computer algorithms, which in turn rippled across indexes and spiraled out of control. Many firms have computers that are programmed to automatically place buy or sell orders based on a variety of things that happen in the markets." So an erroneous trade may have set off a "cascading effect" of other trades that spiraled out of control.
  • Investors Couldn't Keep Up With Information  Reuters' Felix Salmon sees "traders flailing around in a context of limited information and liquidity, trying to get a grip on what was or wasn’t going on. There was always the possibility, after all, that the sellers knew something they didn’t, and that stocks were actually falling for a reason. So it took a few minutes for the market to realize that it was all just market volatility." Georgetown professor James Angel concurs, "We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime."
  • The Psychology Effect of Greek Instability  The Washington Post's Steven Pearlstein reminds us "that the whole thing was triggered when traders around the world simultaneously pushed the "sell" button as they watched live video of baton-wielding riot police wading into a crowd gathered outside the parliament in Athens to protest the passage of austerity measures foisted upon their government by their European neighbors and creditors."
  • Reveals Market Shyness as Stocks Rise  The New York Times' Floyd Norris finds a downside of economic recovery. "It appears that investors are again growing more hesitant to own assets like stocks and bonds, particularly since many now cost far more than they did only a few months ago. Another sharp retrenchment by investors, consumers and businesses could threaten the current global recovery by choking off financing and new orders for companies."
  • Are We Ready For A Cyber Attack?  That's not what this was. But National Journal's Shane Harris thinks it could look similar to this. "Imagine the erroneous quotes as a simulation of a cyber attack on financial data," he writes. Would we be ready?
This article is from the archive of our partner The Wire.