The glitch that sent markets tumbling Thursday was years in the making, driven by the rise of computers that transformed stock trading more in the last 20 years than in the previous 200.
The old system of floor traders matching buyers and sellers has been replaced by machines that process trades automatically, speeding the flow of buy and sell orders but also sometimes facilitating the kind of unexplained volatility that roiled markets Thursday.
“We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime,” said James Angel, a professor of finance at Georgetown University's McDonough School of Business.
In recent years, what is known as high-frequency trading — rapid computerized buying and selling — has taken off and now accounts for 50 to 75 percent of daily trading volume. At the same time, new electronic exchanges have taken over much of the volume that used to be handled by the New York Stock Exchange.
In fact, more than 60 percent of trading in stocks listed on the New York Stock Exchange takes place on other, computerized exchanges.
Many questions were left unanswered even hours after the end of the trading day. Who or what was the culprit? Why did markets spin out of control so rapidly? What needs to be done to prevent this from happening again?
The Nasdaq exchange said it would cancel trades that moved shares more than 60 percent up or down at 2:40 p.m., when stocks like Accenture plummeted to a penny a share, for seemingly no reason. Exelon, the utility operator, fell to a hundredth of a penny, from $44.
Procter & Gamble, a big component of the Dow Jones industrial average, dived 37 percent for a brief time before rebounding. The move by P&G alone pushed down the Dow by more than 150 points, providing cause for a broad alarm among investors, followed by panicked selling.
The Securities and Exchange Commission and the Commodity Futures Trading Commission said they were examining the cause of the unusual trading activity.
Mary Schapiro, the chief of the SEC, and Gary Gensler, the head of the CFTC, held conference calls with overseers of the exchanges who were reviewing trading tapes from the day.
One official said they identified “a huge, anomalous, unexplained surge in selling, it looks like in Chicago,” at about 2:45 p.m. The source remained unknown, but that jolt apparently set off trading based on computer algorithms, which in turn rippled across all indexes and spiraled out of control.
How the markets managed to snap back remained a question Thursday night.
The near-instantaneous swings left brokers dumbfounded. Dermott W. Clancy, who runs a New York Stock Exchange broker, said Thursday was one of the five worst days he has seen in 24 years in the business. When the market dropped across all indexes in a matter of minutes, customers were calling him nonstop.
“They're calling saying ‘Is there something I'm missing? Is there somebody valuing these securities at this level? Is there some news in the marketplace I'm not aware of?'” he said.
The answer — that it all started with an apparent error — infuriated Clancy. “There are so many things wrong with what happened today,” he said. “The market was never down one thousand points. Procter & Gamble should never have traded at $39. But a lot of people lost money as if the prices were meant to drop. This is an injustice to the public.”
The whole trading system, Clancy said, went into what brokers call “slow mode.” When the large sell order came in, the market makers for each of those stocks were overwhelmed trying to sell that order and they could not take other orders. It was sort of like a traffic jam on one highway that spread to create traffic jams everywhere.
Suddenly, traders started to distrust what they were seeing.
“There was no pricing mechanism,” Clancy said. “There was nothing. No one knew what anything was worth. You didn't know where to buy a stock or sell a stock.”