07 May 2010

The mistake that shook the world

With everyone reeling from the stock market gyrations of Thursday May 6th, with the largest intra-day drop ever, we are told that a simple trading mistake was the cause of the dramatic plunge. Someone apparently entered a "b" instead of an "m" when placing a sell order, which resulted in billions of shares being sold rather than just millions.

Now that the mystery is solved we can all breath easier... Hardly!

Trading errors occur all the time, sometimes causing very brief swings in stock indexes. However, these "errors" don't result in any kind of lasting impact, and the gyrations they cause are rather minimal. While it's entirely possible that Thursday's crash was accentuated, or even catalyzed, by human error, it is grossly inacurate to blame the decline on a mistake. In fact, mistakes are far more likely to happen when people are spooked, thus making it inevitable that more glitches would occur than normal when stocks are tanking.

Quite simply, the markets had been getting jittery for a while with the growing sovereign debt problems. Moreover, stocks have rallied so much that their values are already at levels which are hard to justify given the slow nature of the economic recovery seen in the last year. There just wasn't much more room for prices to rally anymore.

Curiously, no one ever makes a big fuss when a trading mistake leads to higher prices. It is only when there is blood in the streets that we look for scapegoats.

If there was indeed a large mistake in some of the orders placed on Thursday then the securities firms, and management bodies, need to rectify the problem and perhaps find ways to help prevent such glitches in the future. But it would be terribly naive to pin the blame for the market crash on an error.

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