Apparently, the stock market took a little tumble last week while I was away on vacation. Now that I’m back, things are looking so much more cheery. Here we are, at 4 p.m., and the Dow, S&P and Nasdaq are all up by more than 3%. I’ve been asked to write a blog post about why.
Well, I’m no stock-market expert, but I’m guessing your main driver is going to be Europe’s $1 trillion bailout package. Other emergency measures, like the Federal Reserve’s re-opened currency swap facility, certainly aren’t hurting either. It’s like a scaled-down replay of the fall of 2008. We’re even back to tracking the VIX. The good news there: the “fear index,” which measures stock-market volatility, dropped by 30% this morning.
I guess the question now is whether we should consider last week’s roller-coaster ride an unfortunate blip or the marker of other bad things to come.
On the European front, we’re in something of a state of wait-and-see. My colleague Michael Schuman has much more enlightened things to say than I do about the Greek-turned-European crisis. I also like the way Marek Belka, head of International Monetary Fund’s European division, framed the significance of the $1 trillion bailout: ”I don’t treat it as a panacea for European problems. This is some kind of morphine that stabilizes the patient. The real medication and the real treatment has to come.” Namely, countries getting their fiscal houses in order.
But back to the U.S. There has been some movement today on figuring out what happened on Thursday with that sudden, 1,000-point drop in the Dow. Here’s the latest, from CNNMoney.com:
It appears that the meltdown was not caused by a computer glitch or a fat-fingered trader who entered an erroneous trade, as some were led to believe Thursday. Instead, the culprit was likely a glitch in the way the stock market operates during a time of crisis.
Trading accelerated at around 2:30 p.m. on Thursday, as traders grew increasingly nervous about Greece’s debt issues… That sell-off led the New York Stock Exchange to initiate a “slowdown” on several stocks which had fallen steeply – 10% in many cases – at around 2:45 p.m. Those stocks stopped trading on the NYSE for a little over a minute in an effort to cool traders’ heads and find some buyers…
Trading of those stocks continued on a number of competitors’ electronic exchanges. Since the NYSE’s slowdown took a large chunk of traders out of the market at a time when everyone wanted to sell, the off-exchange, high-speed trading computers found no bids, or offers to buy.
Those computers, which were looking for the best bid, were tripped up to believe the best bid was $0 for many of those stocks. The high-speed trading computers are designed to add a penny to each trade to make a commission on every deal, so the computers placed bets at a penny higher, or 1 cent. Some stocks’ prices didn’t fall quite as low, or as far, but still entered a sudden tailspin that dragged the market down with it.
Today the SEC met with folks from the major stock exchanges and electronic trading platforms to start working on a new system for stopping all trading when particular shares start to dive. And tomorrow the House will hold a hearing into the causes of the May 6 “flash crash.”
Should we expect to see a repeat of this sort of event? In this op-ed, Georgetown University’s James Angel argues that we probably will—unless we institute better electronic safeguards. Add it to the financial-system reform docket?
