Wednesday, February 28, 2007

Indexes drop and computer power

Major market indexes were down quite significantly, it seems, on Tuesday. Dow Jones closed 3.3% lower, while S&P500 and Nasdaq dropped 3.5% and 3.9% respectively.

For Dow Jones, particularly, a computer problem contributed to the speed of the drop.

It started with huge trading volume -- computer calculation lagged -- switched to backup system -- correction (~an hour of trading reported in seconds) -- market panicked.


The malfunction in the oldest, most established benchmark for U.S. stock prices shows how a technical fault can worsen a market decline.

"I don't think it would have been as bad had there not been some technology issues,'' said Kenneth Polcari, a managing director at ICAP Plc's equities unit who has traded at the New York Stock Exchange for more than 25 years. "The technology issues created some anxiety, which exacerbated the market's move.'' (Bloomberg)
I wonder if someone will soon sue for the loss...

The story from LA Times:
Dow Jones' troubles started about 2 p.m. Eastern time when computer systems were apparently overwhelmed by trading volume, causing the calculation of the widely watched industrial average and other Dow Jones indexes to lag behind trading, spokeswoman Sybille Reitz said.

Once Dow Jones realized that the indexes were lagging — that is, not properly reporting the extent of the market's decline in real time — executives notified the exchanges by phone.

About 3 p.m., Reitz said, Dow Jones switched from its primary server to a backup system, which rapidly caught up with the trading. The result was that an extended period of trading, perhaps the better part of an hour, was reported to the market in a matter of seconds, she said, making it appear as though the Dow Jones industrial average had lost nearly 200 points almost instantaneously. At one moment, the Dow seemed to be down about 280 points; when traders glanced back at their screens, it was down more than 450 points.

That seemingly unprecedented swoon apparently sparked some panic selling that in turn caused a logjam at the NYSE and other markets amid a high volume of trades.