The Anatomy of a 1,000 Point Drop [Update 3]

May 6, 2010 is a day that will not be soon forgotten. The intra-day drop of almost 1,000 points (998.50) on the Dow Jones was the largest in its history. [Previous errors have been corrected] Shortly after the market drop, stocks quickly recovered, but now the industry is investigating what caused such a large drop. Rumours in the market are pointing fingers at a Citigroup trader who made an error on a trade. But for those of you who were working or had no idea what happened today, this is how it all unfolded.

2:30 PM - Dow Jones falls below 10,600.
At around 2:30 PM EST, the Dow fell below 10,600, triggering a wave of selling. The market at this time, was already down over 300 points. VIX (volatility index) spiked up to 35 and would continue to rise. The market would continue to fall and the Dow reached 9,869.62 (-9.18%).

Index options orders disappeared in the market. I personally had puts before this large drop and it got filled on the way down. Minutes after, all orders seemed to have left the market because nobody was comfortable trading. The bid was 0.00 and the ask was 7.40 for a Diamonds May106 put. It seemed as if traders were seeing what was going to transpire as the Dow reached a circuit breaker.

The stock market introduced circuit breakers in the 1980's. The circuit breakers have never been triggered, but today's drop was the closest seen in our history. 2010 Q2 circuit breakers are 1050, 2100, and 3150. Note, the time of the drop would have not created a halt, as a 10 per cent drop after 2:30 PM would not constitute a halt.

2:45 PM - Dow Jones reaches low of the day.
The market's obvious over selling reached its pinnacle and buyers would start coming back into the market. Many financial websites and their servers crashed during this time, and information was not being fed. BigCharts.com stopped streaming the charts of the US markets and Yahoo! website was down for almost two hours. The market would pare 600 points and was only down approximately 400 points.

Many believe the market rebounded only to prevent the exchange from halting. Although one can also argue the market was over sold, since it has fallen 12 per cent in three days.

2:47 PM - Accenture shares trade at 1 cent
Suspect trades start hitting the market. Accenture shares valued over $41 as of today, traded at one penny, Bloomberg reports. Apple shares also hit $100,000 a share today. Expect these trades to be cancelled.

3:10 PM - Dow Jones sudden rise flattens.
20 minutes after the sharp drop, then subsequent rise, the market started to flatten out. Reports started flowing into the market of computer trading or hedge funds selling.

Computer trading has been blamed for sudden drops in the past, when in 2008, 500-point drop days was a regular occurrence. Computer trading is used by large firms to sell when stocks reach a certain price below the current market price. These orders are called stop-loss orders.

3:45 PM - Reports of Human Error and Trades Questioned
After the market started to flatten out, news published that a trader at Citigroup made an error on a trade. Instead of selling one million shares, he put "B" for one billion shares. People speculated and are unsure if his order would cause a market-wide reaction.

4:00 PM - Proctor & Gamble shares in question.
At the end of the trading day, PG shares were being questioned as the stock plummeted over 35 per cent in a day. PG management does not know what happened, but technical glitches are being blamed.

[Section updated at 1:21 AM EST] A rumour has been swirling in the market claiming a Citigroup trader placed a trade for $16 billion instead of $16 million on stock index futures at the Chicago Mercantile Exchange. The CME has responded saying "[there] does not appear to be irregular or unusual in light of market activity today."

PG trades are only being questioned on the NASDAQ. And the Dow Jones finished lower 347.80 after the roller coaster ride. [Additional information added to this section at 1:21 AM EST] The exchange has said that PG shares, as well as Accenture, Apple, and many others, are being cancelled if they did not appear on the NYSE ticker. It is believed the erroneous trades occurred on the NASDAQ electronic platform.

[Additional information added] The NASDAQ and NYSE have announced they are cancelling orders many securities that deviated 60 per cent away from a trade at 2:40 PM. Here is the official list. You may have received this from your brokerage as well. Click here for list.

This blog may be updated as more information is revealed through out the day. This blog was last updated at 1:36 PM EST (May 7, 2010).