A false report of explosions at the White House that wiped out $136 billion from the Standard & Poor's 500 Index in about two minutes Tuesday highlighted the risks of the computerized trading that dominates the $18 trillion market.
The S&P 500 was up about 1 percent at about 1,578 at 1:07 p.m. New York time when a posting on the Associated Press Twitter account said there had been explosions at the White House and President Barack Obama had been injured. The index erased almost the entire gain, falling as low as 1,563.03 by 1:10 p.m. The index recovered from the plunge within three minutes as the news service said its Twitter account had been hacked and there were no explosions. The Dow Jones industrial average retreated about 145 points before recovering.
“Trades should not be busted,” Rick Fier, director of equity trading at Conifer Securities LLC in New York, said. His firm oversees $8 billion in assets. “No human believed the story. Only the computers react to something that serious disseminated in such a way. ...Humans win.”
Exxon Mobil, Apple, Johnson & Johnson and Microsoft briefly lost about 1 percent in two minutes before rebounding. The plunge didn't trigger circuit breakers for individual stocks. Shares for most companies pause for five minutes if they lose 10 percent in five minutes.
“It's one thing for an illiquid stock to do that, but how does a multitrillion-dollar market do that?” Walter Todd, who oversees about $940 million as chief investment officer of Greenwood Capital Associates LLC in Greenwood, S.C., said. “That's very disturbing to me. It's unnerving.”
Traders said the selloff may have been exacerbated by so- called stop-loss orders, which are placed by investors to automatically sell stocks when declines of a specified threshold are reached.
“The whole lesson is never do stop-losses,” said Barry Schwartz, fund manager with Baskin Financial Services Inc. in Toronto. “That's what I took from this. Same with the flash crash. Second is I don't know how markets can react to that news so quickly. It must be programmed computer trading, which is also quite scary,” he said. “Don't let computers rule your investments.”
On the floor of the NYSE on Wall Street in Manhattan, Jonathan Corpina said he immediately called a client who works two blocks away from the White House to confirm the story.
“He did not know what I was talking about,” Corpina, senior managing partner with Meridian Equity Partners Inc., told Bloomberg Radio. “He said I'm staring at the White House and there's nothing going on here right now,” he said.
Algorithmic trading programs that read news headlines may have started the selling, he said. “And then other algos jump in to play the snowball effect, and little by little you have the computer trading systems that have canceled all their orders on the buy side and the sell algos hit all these bids, and that's the big dip we saw,” he said.
Tuesday's plunge reminded many traders of the May 2010 flash crash that briefly erased $862 billion in market value in less than 20 minutes. Regulators and exchanges are altering the speed bumps adopted after that incident in an effort to boost confidence in a market that has become faster and more complex over the last decade. Under the limit-up/limit-down system, which is going into effect gradually for stocks, trades aren't allowed to occur at more-than specified percentages above or below a stock's rolling five-minute average price.