Regulators seek clues to market plunge

May 8, 2010 at 12:00a.m.

Associated Press

NEW YORK

Regulators and Wall Street officials went through millions of trades one by one Friday and canceled thousands as they sought to explain a record plunge in the stock market, undo damage and keep it from happening again.

It wasn’t clear how long the laborious process would take or if it would even solve the mystery behind Thursday’s harrowing trading session that saw the Dow Jones industrial average fall hundreds of points and then recover, all in a matter of minutes. The chaotic slide — some stocks briefly fell to near zero — brought back memories of the darkest days of the financial crisis.

The Securities and Exchange Commission and the Commodity Futures Trading Commission were investigating, but on the day after, there were more questions than answers:

Did a single trader mistakenly punch in the wrong number of shares when making a sell order, maybe mistyping “billion” instead of “million” and setting off a marketwide panic that at one point pulled the Dow down almost 1,000 points?

Did high-speed computerized trading systems that are supposed to make markets work smoothly go haywire, sending stocks into a nosedive?

Most important to anyone with money in the stock market: Could it happen again?

Maybe the scariest part was that no one could unravel what happened. That left executives at the major stock exchanges pointing fingers at one another, and the public wondering if the hidden world of high-frequency, computerized trading that fed the panic posed a threat to their 401(k)s.

“It could be awhile before they figure it out because they have to sift through everything trade by trade,” said San Diego State University finance professor Dan Seiver, who has followed the markets for 52 years. “And humans are a lot slower than machines.”

Market officials worked to cancel thousands of “clearly erroneous” trades made during the plunge.

New York Stock Exchange Euronext CEO Duncan Niederauer told CNBC that his exchange canceled 4,000 trades.

At Direct Edge, the third-largest U.S. exchange, employees worked through the night reviewing some of the 10 million trades made Thursday and found 2,000 that had to be canceled, said chief executive William O’Brien.

BATS Global Markets, one of the largest U.S. trading networks, had to cancel 540 trades.

The turbulence continued Friday. Amid anxiety about the unexplained plunge and the growing debt crisis in Europe, the Dow was down as much as 280 points before closing down almost 140.