Market free fall on Thursday sparks concerns

May 7, 2010 4:14:10 PM PDT
The Dow closed down nearly 140 points Friday, which is another drop for Wall Street after Thursday's unprecedented plunge and recovery.

And while an investigation is underway to determine whether an error caused the so-called "flash crash," experts say computer driven trading may have added to that freefall.

It looked like human error was to blame; someone entering a sale of shares worth $16 billion that should have been $16 million. That's still being investigated, as is the roll of computer trading.

Most of the stock trades today are done by computers, which can make trades in seconds, and some investors have programs that will sell off stocks once prices fall. Experts say it was that computer-based trading that added to the huge fall on the stock market.

While there are still plenty of traders on the floor of the New York Stock Exchange, most trades are not done by a person.

"More than 60 percent of the trades on a daily basis are done on computers," Streettalk Advisors Financial Advisor Lance Roberts said. "They react in microseconds; you react in days."

Roberts says the details of the big plunge in the market are still under investigation, but one thing is clear: Computer-based trades played a role in Thursday's fall and rise of the market.

During the fall, computers placed orders to sell stocks as those stocks lost value. Eventually, some stock values hit one penny.

On the way back up, computer programs triggered the buying of stocks so some portfolios lost money, others may have gained -- all in the blink of an eye.

"It has taken away the ability for an individual to manage money effectively for himself and making it more and more difficult to have money invested in the market," Roberts said.

Federal agencies are still trying to determine what happened Thursday, and they are playing close attention to the computer-driven trading.

"It is a little bit too soon to blame it on computerized trading or algorithmic trading," University of Houston Finance Professor Craig Pirrong said. "It could have been old-fashioned trading techniques."

Pirrong believes new rules for computer trading may come from the Thursday dip. In the meantime, some trades from Thursday are being canceled.

"I think that is a very bad idea because the trades that are most likely to be busted are these destabilizing stop-order trades," Pirrong said, 'and so we don't want to do is basically say, 'Hey use a destabilizing order, and if it goes bad for you, we will bail you out.'"

The market moves on Thursday had an impact on local companies.

CenterPoint Energy saw its stock value drop to just pennies at one point. It is one of the companies that saw trades canceled.

Your mutual stock funds probably went down because the market was done at the close of business. But because the market came back up, the losses were not as bad as it looked like it would be.

The other concern for traders is that confidence in the market took a hit and that could lead to people keeping their money out of the market.


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