The Dow Plunges 1000 Points Then Recovers

The stock market saw a huge decline yesterday for about fifteen minutes before going on to recover later in the day. The Dow Jones industrial average fell by almost 1000 points, about 10%, in the afternoon before closing 3.2% lower.

The sharp decline stunned both retail investors and Wall Street experts as the media scrambled to look for reasons behind it. The fall, which came at about 2:30, was the largest in intraday trading in the history of New York Stock Exchange. It saw some logic defying declines in stock prices of blue chip companies like P&G, which fell from more than $60 to about $40 in a matter of a few minutes.

The immediate reaction of analysts to the fall in the stock market was to blame it on all the uncertainties surrounding the Greek Bailout. However, as the market began to recover, other theories began to emerge. There have been rumors that the fall was caused by an erroneous trade – an order for $16 million being entered as $16 billion in the trading system. This led to a cascading effect with all other stock prices falling in tandem.

As most of the trading takes place through computers these days, any fall in the stock market can be significantly amplified. Institutional investors often place automatic trades for buying or selling stocks. When the market falls many of these automatic sell orders are triggered so that the investors can limit their losses.

But the moment these sell orders are executed, the prices fall further, which in turn triggers another round of sell orders. This vicious cycle is stopped only then the market hits a circuit breaker or when traders start taking control of their systems.

As the markets fell yesterday, regulators, lawmakers, and companies rushed to calm the investors and assure them that there was nothing wrong with the economy. A P&G spokesperson said that no major event had taken place in the past few days that should cause such a fall.

The SEC came out with an announcement that it would be analyzing market data along with other regulators to find out what the cause behind the fall was. Treasury Secretary, Timothy Geithner, held discussions with the SEC and Federal Reserve officials. He briefed President Obama later in the day about the events. Investigations into the unusual trading are likely to continue for the next few days.

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