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What caused the Dow’s big plunge?

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Kai Ryssdal: I don’t mind telling you, gang, for about 15 minutes today — right around 3 o’clock New York time — there was a little voice in the back of my head saying, “Oh, man. Here we go again.” In less time than it’s going to take us to tell you the story, the Dow Industrials dropped 700 points, off 998 from the open. Before what you can only call an amazing rally — the stock market equivalent, really, of a bungee jump. Marketplace’s Jeremy Hobson’s on the line from New York to help understand what happened. Hey, Jeremy.

Jeremy Hobson: Hi Kai.

Ryssdal: Obvious cause of this whole thing was Greece. Vivid television pictures of the riots over there over their economic problems. But it does smell like a little bit like there’s some fear in the markets, no?

Hobson: It sure does. It reminded me of those days back in the fall of 2008 in the financial crisis when you’d look on the TV and the Dow was down 50 points and the next thing you know it’s down 500 points. It was kind of amazing to watch today. The Dow was down a few hundred, then 600, 700, 800, 900. And before you’d know it, it was right back up. So, yes, fear definitely played a part in this. It doesn’t help, as you said, to have the police in riot gear on television next to the stock market. It’s a bit scary. But underneath all this there are worries about the credit markets. One bond trader I spoke with today said even as the Dow rebounded, the corporate bond market did not. He says that means that there really are fundamental problems there. Lending, he says, is the tightest it’s been since last July and a lot of bond traders would rather sit on the sidelines as this crisis plays out.

Ryssdal: What I hear you saying, Jeremy, is that there are real fears about contagion and problems in Europe coming over here.

Hobson: Absolutely. And there’s the direct cause there. You’ve got Greece and these other countries, Spain and Portugal, that there are worries over. And their trade with us. And the idea that if they’re going to dip into a double-dip recession, obviously that’s going to affect U.S. companies. The other thing is, how this is affecting the European banking system and whether European banks will stop lending to each other the same way that U.S. banks stopped lending to each other during the financial crisis here.

Ryssdal: Take this apart for me in terms of the mechanics of what happened on Wall Street today. There is electronic trading, there are algorithms that these guys use to judge certain market factors. And that, really, is what explains this unbelievable drop and then the incredible rebound.

Hobson: Right. There are some rumors going around now that maybe there was a mistyping by some trader at a bank and all of a sudden shares of Procter & Gamble were sold. But what happens — regardless of whether that was the case — is that when the market falls by that much a lot of machines are triggered to sell and it makes the problem that much worse that fast. It is high-frequency trading at its finest, or perhaps at its worst.

Ryssdal: At its worst, yeah.

Hobson: Now one other thing, Kai. As the Dow fell so fast there was some question about whether the market would close because of the circuit breakers at the New York Stock Exchange. But it turns out, because it happened after 2:30 p.m., it would have had to fall by more than 2,000 points for the market to close. And of course it didn’t even reach a thousand-point drop at any point.

Ryssdal: OK, so here’s where you earn your money. What’s going to happen tomorrow at the open?

Hobson: Well, I would love to be able to answer. I could probably make a lot more money doing something else if I knew. But I think what was so surprising about what happened today is that the market has really been on a steady climb for the past several months until this week. So there was obviously some pent-up fear. And the question of what’s going to happen going forward with that fear — just a little push from Europe and investors start selling. Now one investor I spoke with today said stand by for a bumpy trading day tomorrow. He says all eyes are going to be on Europe again for the vote on the bailout package for Greece. A vote that is expected to be very close.

Ryssdal: And don’t forget the British elections and also job numbers here tomorrow morning. Jeremy Hobson at the Marketplace New York bureau. Thank you, Jeremy.

Hobson: Thanks Kai.

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