U.S. stock market plunge on Monday September 24, 2015

Such was the drama at the open of trading in the American equity market Monday, when waves of global selling battered stocks with almost unprecedented force. At its worst, about $1.2 trillion of market value had been erased from U.S. shares before prices leveled off and the Dow Jones Industrial Average rebounded almost 1,000 points.

At one point the Standard & Poor's 500 Index came within 34 points of setting off a marketwide circuit breaker that would've shut down trading for 15 minutes to restore order. More than 2 billion shares changed hands in the first 30 minutes, almost one-third of what usually trades in a day.

Fear gripped traders for half an hour as selling deepened after the biggest plunge in four years. General Electric Co., the 10th-largest U.S. company by market value, and JPMorgan Chase & Co. dropped as much as 21 percent, their worst intraday losses since 1987 and 2009, respectively. Stocks in the Dow Jones Industrial Average were down 11 percent on average at their lowest point.

 

APPLE'S PLUNGE

The Nasdaq 100 Index plunged as much as 9.8 percent at the open as Apple Inc. tumbled as much as 13 percent while Google Inc. and Microsoft sank more than 7 percent.

 

In the options market, the Chicago Board Options Exchange Volatility Index failed to update for about 30 minutes after the open of stock trading at 9:30 a.m., data sent to Bloomberg show. Trading in the contracts from which the VIX is derived was too disjointed to calculate a value, its overseer said.

Then there were momentum stocks, winners in recent months whose success underpins an investing strategy that, through July, had posted some of its best relative returns on record. Investors access the group via the Powershares DWA Momentum Portfolio, an exchange-traded fund that saw assets balloon to more than $2 billion in August.

In a matter of seconds after the open, the security with ticker symbol PDP plunged 36 percent, to $26.59 from Friday's close of $41.36.

ETF LOSSES

A handful of other ETFs swung wildly, among them First Trust Dow Jones Internet Index Fund, the iShares Global Healthcare ETF, the PowerShares Global Water Portfolio and the iShares Russell Mid-Cap Value ETF.

“It felt like a very technical open,” said Edward “Eddie” Perkin, chief equity investment officer at Eaton Vance Corp., which oversees $311 billion. “Some volume went through at those crazy prices” and it was reminiscent of the May 2010 flash crash, in which “no one was there on the bid side of the trade.” Automated trading strategies got some of the blame in the aftermath of that plunge five years ago.

Or maybe it was just emotions getting the better of people.

“Today looked human to me, it didn't look machine-driven,” said Dave Lauer, co-founder and chief technology officer of market research firm Kor Group LLC. “There's one critical difference between today and the flash crash — in the flash crash, there was no precipitating event, whereas today everything seemed to be very explicable. Markets around the world were down 7 to 8 percent and the U.S markets started to follow suit.”

HAYWIRE TRADING

Something went awry with XL Group's stock just after 9:30 a.m. About 20 seconds after the market opened, the $11 billion corporation's shares changed hands for $34.84. A second later, it plunged to $3.66 in a single trade, according to data compiled by Bloomberg. A total of about 122 trades priced below $6 executed in the next three minutes before the stock jumped back up to above $35.

UnitedHealth Group tumbled as much as 18 percent on Monday while Pfizer lost 15 percent.

 

“It really felt like everybody was just selling everything they could imagine,” Mark Kepner, an equity trader at Themis Trading LLC in Chatham, New Jersey, said by phone. “We've had calm for a long time and this felt like capitulation, people selling anything to raise cash.”

Human Error Said to be Source of Huge Market Selloff

(FOXBusiness)A fat-fingered trader may not have caused the 998-point drop in the stock market two weeks ago, but some type of human error appears to be the source, according to the preliminary findings of a government study into the massive market decline, FOX Business has learned.

The final report, to be published by the Securities and Exchange Commission, could be made public as early as today, FOX Business has learned, and it will lay out the causes of the market plunge that has renewed calls for a more coordinated market structure, along with increased regulation of the securities markets.

But according to people with knowledge of the study’s preliminary findings, there was some human error, or as one person with direct knowledge of the report told FOX Business, a “poorly handled order,” at the Chicago Mercantile Exchange, which touched off massive trading in the markets, particularly at the New York Stock Exchange.

At that point, specialists on the floor of the exchange stopped making markets in various stocks that began to trade lower on other exchanges that don’t slow down trading, as the NYSE does in times of stress.

According to people with knowledge of the preliminary findings, the entire market plunge lasted 17 minutes, but the last three minutes saw a massive amount of selling from retail brokers who sold stock on behalf of individual investors.

It’s unclear if these points will be made in the final report when it is publicly released, or in what form they will be disclosed.

An SEC spokesman declined to comment on the matter.

When the markets plunged two weeks ago, rumors circulated that a “fat fingered” trader at Citigroup (C: 3.88, 0, 0%) was responsible for the market plunge by typing in an order to sell billions instead of millions. Regulators quickly discounted that rumor and began to investigate the market decline.

Since then, market experts have been pointing to faulty computer programs at the NYSE as the cause and a lack of market integration.

For its part, CME Group (CME: 316.05, 0, 0%) said in a statement that it apologizes for delays in its messaging systems on May 6 that affected clearing firms. Its clearinghouse staff added systems to handle what it called increased message flow. It did not specifically mention any trader or firm.

Waddell is mystery trader in market plunge

(Reuters) – A big mystery seller of futures contracts during the market meltdown last week was not a hedge fund or a high frequency trader as many have suspected, but money manager Waddell & Reed Financial Inc, according to a document obtained by Reuters.

Waddell sold on May 6 a large order of e-mini contracts during a 20-minute span in which U.S. equities markets plunged, briefly wiping out nearly $1 trillion in market capital, the internal document from Chicago Mercantile Exchange parent CME Group Inc said.

The e-minis are one of the most liquid futures contracts in the world, providing holders exposure to the benchmark Standard & Poor's 500 Index. The contracts can act as a directional indicator for the underlying stock index.
Regulators and exchange officials quickly focused on Waddell's sale of 75,000 e-mini contracts, which the document said "superficially appeared to be anomalous activity."

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, said in congressional testimony on Tuesday that it had found one sale was responsible for about 9 percent of the volume in e-minis during the sell-off in the U.S. markets.

Gensler said there was no suggestion that the trader, whom he did not identify, did anything wrong in only entering orders to sell. Gensler said data show that the trades appeared to be part of a bona fide hedging strategy.

It's unclear what impact the trading in the e-minis had on stock prices during the plunge, but regulators have scrutinized futures trading because the sharp decline in that market preceded the dive in the broader U.S. equities market.

The CME document shows that during the sell-off and subsequent rally, other active traders in e-minis included Jump Trading, Goldman Sachs Group Inc, Interactive Brokers Group Inc, JPMorgan Chase & Co and Citadel Group.

During the 20-minute period, 842,514 contracts in e-minis were traded while Waddell from 2 p.m. EDT to 3 p.m. traded its contracts, CME said. The CME document did not provide a break-out of Waddell's trading during the crucial 20 minutes.

Overland Park, Kansas-based Waddell declined to return calls seeking comment. But in a statement, the company said: "Like many market participants, Waddell & Reed was affected negatively by the market activity of May 6."

Waddell said in its statement that it often uses futures trading to "protect fund investors from downside risk," and on May 6 it executed several trading strategies including the use of index futures contracts as part of the normal operations of its flexible portfolio funds. The company advises and distributes the Ivy Funds, a family of mutual funds.

Waddell said it believes it was "among more than 250 firms" that traded e-minis during the market sell-off.

Waddell's shares were down almost 6 percent to $32.07 in afternoon trading.

The CFTC declined to comment.

A CME spokesman, who declined to comment on the document, said the Chicago-based futures exchange operator never discusses customer activity.

"We found no evidence of improper trading activity or erroneous trades by CME Globex customers," said CME spokesman Allan Schoenberg.

Trading in e-minis takes place entirely on the CME's Globex exchange. Hedge funds and high-speed trading firms often use the e-mini in an arbitrage strategy that seeks to capture the change in prices between the futures contract and the S&P 500.

Waddell's contracts were executed at Barclays Plc's Barclays Capital and later given up to Morgan Stanley, according to the document.

CME said it spoke to representatives from both banks on May 6 and planned to speak to Waddell representatives the following day. The firm oversaw $74.2 billion in assets as of March 31.

Morgan Stanley told CME that it did not have concerns regarding Waddell's activity because it "would typically use equity index futures to hedge macro market risk associated with the substantial long exposure of its clients," the document said.

'QUITE A SHOCK TO THE MARKET'

Gensler said the contracts were sold between 2:32 p.m. and 2:51 p.m., the height of the meltdown.

The market for e-minis on May 6 fell more than 5 percent in a little more than 5 minutes starting at 2:40 p.m. -- the height of the crash, the document said. The e-minis began to recover before stock prices turned higher.

An order the size of the Waddell contract would be a big trade to execute on a normal day, said a trader whose firm is active in the S&P 500 futures market. About 50,000 contracts are typically traded in an hour, the trader said.

"To get rid of 75,000 contracts, that's a lot of trading even if the market is healthy," the trader said. "But when suddenly the market changes and there's not as many bids there to trade with, 75,000 is going to cause quite a shock to the market.

"That's an enormous position for anybody, whether it's a hedge or whether it's a trade. It's a big position, no doubt about it," the trader said.

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CEOs of Biggest U.S. Exchanges Called to SEC to Discuss Plunge

(Bloomberg) -- The chief executive officers of the biggest U.S. stock markets were called to a meeting at the U.S. Securities and Exchange to discuss last week’s selloff in equities, according to four people familiar with the situation.

Duncan Niederauer of NYSE Euronext, Robert Greifeld of Nasdaq OMX Group Inc., Joe Ratterman of Bats Global Markets Inc. and William O’Brien of Direct Edge Holdings LLC will meet with agency officials tomorrow at 10 a.m. in Washington, said the people, who asked not to be identified because the meeting hasn’t been publicly announced.

The SEC is considering regulatory changes aimed at slowing stock trading during periods of cascading prices, even though the agency hasn’t yet concluded what caused the plunge, two people familiar with the matter said on May 7.

About $700 billion of value was erased from U.S. exchanges during an eight-minute span on May 6. Computerized trades sent to electronic networks turned an orderly stock market decline into a rout, according to Larry Leibowitz, the chief operating officer of NYSE Euronext. Nasdaq canceled trades in more than 200 securities that rose or fell 60 percent or more.

Almost 1.3 billion shares traded on U.S. markets in a 10- minute span starting at 2:40 p.m. on May 6, six times the average, sending prices lower on platforms from New York to Kansas City. Federal agencies began inquiries after the Dow Jones Industrial Average slumped almost 1,000 points intraday before paring losses.

SEC spokesman John Heine did not immediately respond to a phone call and email requesting a comment.

CME will not cancel any trades after Thursday's market gyrations

(AP) — CME Group Inc., which operates the Chicago Mercantile Exchange and the Chicago Board of Trade, said its markets functioned properly on Thursday during Wall Street's wild swing, and that it was not canceling any trades.

The company said it saw "significant market activity due to global macroeconomic conditions" on Thursday.

Some trades on Nasdaq and the New York Stock Exchange's electronic platform were canceled.
But CME Group spokeswoman Anita Liskey said on Friday that none of Thursday's trades would be canceled, because there were no abnormalities on its exchanges.

"It does not appear that CME Group clearing firms or customers experienced any significant technological failures or trading errors during this timeframe" of 1 to 2 p.m. CDT, when the market was going through its swings.

CME said all of its clearing members remain in good standing and have met their financial obligations to the CME Clearing House.

U.S. stock plunge raises alarm on algo trading

(Reuters) - A spine-chilling slide of nearly 1,000 points in the Dow Jones Industrial Average, its biggest intraday points drop ever, led to heightened calls for a crackdown on computer-driven high-frequency trading.

The slide, which in one 10-minute stretch knocked the index down nearly 700 points, may have been triggered by a trading error. Major stock indexes eventually recovered from their 9 percent drops to close down a little more than 3 percent.

But the follow-through selling that pushed stocks of some highly regarded companies into tailspins exacerbated concerns that regulators can quickly lose control of the markets in a world of algorithmic trading.

High-speed trading, which uses sophisticated computer algorithms based on specific scenarios to automate transactions at speeds in the millionths of a second, now accounts for about 60 percent of U.S. equity volume.

"The potential for giant high-speed computers to generate false trades and create market chaos reared its head again today," Senator Edward Kaufman said in a statement.

"The battle of the algorithms -- not understood by nor even remotely transparent to the Securities and Exchange Commission -- simply must be carefully reviewed and placed within a meaningful regulatory framework soon."

Kaufman and Senator Mark Warner -- both Democrats -- said Congress needs to investigate the plunge, which at its deepest point wiped nearly $1 trillion off equity values.

And a House panel has slated a hearing on the causes for the market swoon for next Tuesday, with its chairman, Rep. Paul Kanjorski, urging the SEC to investigate as well.

The scary afternoon in markets came at a bad time for Wall Street, already reeling from accusations that it is a rigged casino -- a criticism stoked by recent civil fraud allegations against Goldman Sachs Group Inc (NYSE:GS - News).

The industry has been trying to stave off the Obama administration's calls for tough financial regulation, and the sell-off came as the Senate turned back a Republican effort to weaken a plan to set up a financial consumer watchdog.

SOME TRADES TO BE Canceled

Lending credence to the sense that the sell-off was exacerbated by technical errors, the Nasdaq stock exchange and NYSE-Arca said they would cancel certain trades that happened during the period in question.

But only trades in stocks that moved 60 percent up or down were covered by the cancellations, leaving some investors with potentially major losses on stocks such as Apple Inc (NasdaqGS:AAPL - News) and Procter & Gamble Co, which suffered lesser, but still significant, declines.

The U.S. Securities and Exchange Commission and Commodity Futures Trading Commission said they were reviewing the unusual activity and working with the exchanges to protect investors.

Citigroup Inc (NYSE:C - News) said it was investigating a rumor that one of its traders entered the trade, a spokesman for the bank said on Thursday. Citigroup, the third-largest U.S. bank, said it has no evidence that an erroneous trade has been made.

Several market participants cited speculation that a trader at Citigroup had erroneously placed an order for at least $16 billion in E-Mini contracts -- stock market index futures contracts that trade on the Chicago Mercantile Exchange's Globex trading platform.

But a source familiar with the situation said Citigroup had traded a total of just $9 billion of the E-Mini contracts, adding that that amounted to less than 3 percent of the $319 billion traded on the E-Mini on Thursday.

CME said the bank's trades in CME index futures appeared normal.

'SCREWED UP'

Earlier, sources told Reuters that the plunge in the Dow Jones Industrial average may have been caused by an erroneous trade entered by a person at a big Wall Street bank.

During the sell-off, Procter & Gamble shares plummeted nearly 37 percent to $39.37 at 2:47 p.m. ET (1847 GMT), prompting the company to investigate whether any erroneous trades had occurred. The shares are listed on the New York Stock Exchange, but the significantly lower share price was recorded on a different electronic trading venue.

"We don't know what caused it," said Procter & Gamble spokeswoman Jennifer Chelune. "We know that that was an electronic trade ... and we're looking into it with Nasdaq and the other major electronic exchanges."

A different P&G spokesman had said earlier the company contacted the Securities and Exchange Commission, but Chelune said that he spoke in error.

One NYSE employee leaving the Big Board's headquarters in lower Manhattan said the P&G share plunge lay at the center of whatever happened.

"I'll give you a tip," the employee said, speaking on condition of anonymity. "P&G. Check out the low sale of the day. Something screwed up with the system. It traded down $30 at one point."

A vicious market sell-off like Thursday's can be exacerbated when quickly sliding stock prices turn stop loss orders into market orders, meaning shares get sold at any price available.

WIDE SWINGS

NYSE Euronext (NYSE:NYX - News) said it was a safer place to trade than its electronic rivals -- who have been taking market share from it in recent years -- because it deliberately slowed down market making when it realized there was something extraordinary happening.

Triggered by unusual volatility in some stocks, NYSE brought in a "mini circuit-breaker" -- a liquidity refreshment point, or LRP -- to slow trading, which then jumped to other, fully electronic exchanges.

"It validates the decision to offer a hybrid market here where there's a human component married with the electronic," Louis Pastina, executive vice president of NYSE Operations told Reuters in an interview.

The NYSE's rivals advertise lower prices or faster transaction speeds.

The market plunge and especially wide swings in some individual stocks reignited some wider criticism of high-frequency trading, a strategy using lightning-fast computer programs to track market trends.

"We did not know what a stock was worth today, and that is a serious problem," said Joe Saluzzi of Themis Trading in New Jersey, a frequent critic of computer-driven high frequency trading.

Investors had already been on edge throughout the trading day after the European Central Bank did not discuss the outright purchase of European sovereign debt as some hoped they would to calm markets.

While the exchanges' move to cancel some of the most suspect trades may mollify some, there remained more questions than answers about the market's wild afternoon.

"The trouble is the exchanges aren't saying what caused the erroneous trade," said James Angel, a professor at Georgetown University's McDonough School of Business who specializes in market structure. "What they are saying is that it's not my fault, it was somebody else's fault."

Citigroup probes rumor that trade error triggered Dow drop; CME says no system problems

(Reuters) — Citigroup is investigating a rumor that one of its traders entered a trade that helped precipitate a drop of almost 1,000 points in the Dow Jones Industrial Average, a spokesman for the bank said on Thursday.

Citigroup, the third-largest U.S. bank, currently has no evidence that an erroneous trade has been made, the spokesman said.

Earlier, sources told Reuters that the plunge in the Dow Jones Industrial average — its biggest intraday point drop ever — may have been caused by an erroneous trade entered by a person at a big Wall Street bank.

Market sources said the erroneous trade may have involved shares of the so-called E-Mini, a stock market index futures contract that trades on the Chicago Mercantile Exchange's Globex trading platform. The composition of the E-Mini is similar to the stocks in the S&P 500.

A CME spokesman said it found no problems with its systems.

Other market sources said the erroneous trading involved the IWD exchange-traded fund or the S&P 500 Mini. A person close to BlackRock, which manages the IWD, said there was no unusual trading in the iShares product.

Amid the sell-off, Procter & Gamble shares plummeted nearly 37 percent to $39.37 at 1:47 p.m. Central time, prompting the company to investigate whether any erroneous trades had occurred. The shares are listed on the New York Stock Exchange, but the significantly lower share price was recorded on a different electronic trading venue.

"We don't know what caused it," said Procter & Gamble spokeswoman Jennifer Chelune. "We know that that was an electronic trade ... and we're looking into it with Nasdaq and the other major electronic exchanges."

A different P&G spokesman had said earlier the company contacted the Securities and Exchange Commission, but Chelune said that he spoke in error.

One NYSE employee leaving the Big Board's headquarters in lower Manhattan said the P&G share plunge lay at the center of whatever happened.

"I'll give you a tip," the employee said, speaking on condition of anonymity. "P&G. Check out the low sale of the day. Something screwed up with the system. It traded down $30 at one point."

Nasdaq said it was working with other major markets to review the market activity that occurred between 1:00 p.m. and 2:00 p.m. Chicago time, when the market plunge happened.

The exchange later said it was investigating potentially erroneous transactions involving multiple securities executed between 1:40 and 2:00 p.m.

Nasdaq also said participants should review their trading activity for potentially erroneous trades.