There's a lot of head scratching and finger-pointing on Wall Street on Friday, as industry and government officials are trying to figure out what caused the 16 minutes of chaos that left the Dow industrials down almost 1,000 points and had some major stocks trading for pennies a day earlier.
The bizarre market meltdown Thursday afternoon started amid already frenetic selling. Investors were unloading stocks and heading for the safety of U.S. Treasury bills and gold in response to the Greek debt crisis.
But the as the market fall accelerated at an eye-popping rate, and then reversed course abruptly and recovered, it was clear something strange had happened. In a brief digression during his statement Friday on employment gains in April, President Obama addressed what he called "the unusual market activity."
"Regulatory authorities are evaluating this closely with a concern about protecting investors and preventing this from happening again," he said.
On Wall Street, two big players were arguing about who caused the chaos, man or machine -- computers, that is.
In separate interviews on the financial news channel CNBC, Robert Greifeld, head of the all-electronic Nasdaq market, was defending machines; Duncan Niederauer, CEO of the New York Stock Exchange, which still has real people on its trading floor, was in the humans' corner.
Humans To Blame?
Greifeld was clearly smarting from suggestions that high-speed computer-trading programs had triggered the huge meltdown. So, he criticized the humans in the New York Stock Exchange for briefly halting the trading in some big-name stocks such as Procter & Gamble, 3M and Accenture.
"You had the primary market, the listing market deciding not to support the stock, deciding not to trade it," Greifeld said. "That sent a signal to a very nervous market."
The signal was a negative signal "that there's something wrong with this stock. Instead of standing behind" the stocks," Greifeld said, the NYSE "basically walked away" from them.
But the NYSE's Niederauer said his exchange didn't walk away but actually embraced its responsibility. Its human traders saw anomalies in the behavior of the stocks, he said, and decided to flip their single-stock circuit breakers, pausing trading for 60 to 90 seconds.
Niederauer says the NYSE notified all the other markets of the pause in trading.
"They have two choices in that next 30 to 60 seconds," he said. "They can wait [hold off trading] and work with us" or simply continue trading, and "that's exactly what all the markets did."
So the electronic markets, including the Nasdaq, continued to trade the stocks in question. The problem was there were very few buyers, a "lack of depth" in market terms, and the bids were very low. So P&G, which had been trading at about $60 a share, dropped 37 percent to below $40 on the Nasdaq. Accenture went from $40 a share to 1 cent a share.
The problem, Niederauer said, is that no humans were involved to say those trades made no sense.
"What clearly can happen if you have a lack of depth on these electronic markets" he said, is that a computer will make any trades and not discriminate between one that's rational and another that's irrational.
Those distorted trades Thursday activated other sell programs that caused the Dow to drop more than 700 points in about 10 minutes.
The incident clearly exposed a flaw in way U.S. stock markets work with one another. One regulatory change that could emerge is a requirement that circuit breakers that slow trading in individual stocks be applied uniformly across all stock exchanges.
The Securities and Exchange Commission and the Commodity Futures Trading Commission indicated Friday they are focusing on just this kind of issue.