Special Market Update
While our regular monthly market will be coming out early next week, we wanted to reach out to our clients regarding the very volatile action in the market yesterday. The Dow Industrials ended the day down about 3.2% but in a twenty minute period starting around 2:40 PM, the average plunged to down 10% before recovering. The chart below details both the depth and rapidness of the movement.
The primary cause for the recent weakness in the market has been the continued fears of sovereign default contagion emanating out of Europe. However that does not explain yesterday's intraday collapse and rebound. At its lowest, it would have been the second worse one day percentage decline ever for the Dow Jones Industrial Average. The movement in some individual stocks was even greater, with large multinational companies such as Accenture and Philip Morris losing over 90% of their value for a few minutes. Right now the most popular speculation is that a large erroneous trade caused a sudden drop in the futures market triggering a cascading reaction among automatic trading programs. In the last few years, markets worldwide have moved toward greater electronic trading. While this increases the speed and liquidity of trading during normal conditions, it means that markets have less depth in times of extreme volatility as there are no longer any mechanisms to slow trading or allow human intervention. On the floor of the NYSE we had a front line view of both the advantages and flaws inherent in these changes. Yesterday's events have attracted the attention of many but, unfortunately, this type of disruption happens very often on a smaller scale in todays markets. We have added a few links detailing the day below. Of course, we encourage anybody with any questions or concerns to call us at any time.
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