Who’s to blame for the big Dow drop?

Amy Scott May 7, 2010

Who’s to blame for the big Dow drop?

Amy Scott May 7, 2010


Kai Ryssdal: In the hashing and rehashing of what happened in the markets yesterday, the conversation has largely come down to computers versus people. Somebody on a trading floor somewhere just making a mistake or what’s known as “high frequency trading,” split-second computer buying and selling that makes up about 60 percent of the market. Enough to turn a mildly scary day downright terrifying.

Marketplace’s Amy Scott reports.

Amy Scott: The market decline triggered systems that sell automatically when stocks fall below a certain threshold. Analysts say that accelerated the downward spiral.

But Justin Schack with Rosenblatt Securities says it’s too early to put all the blame on machines. He says even in the extreme volatility of the financial crisis, nothing like this happened.

Justin Schack: I think if it had something to do with trading being highly automated, we definitely would have seen the kinds of events like yesterday back during that even more volatile period of late ’08 and early ’09.

High-frequency traders are getting a lot of the blame. Analysts say they stopped buying stocks when prices plummeted and that pushed prices even further down.

But Irene Aldridge says computers may have actually saved the day. She’s a high-frequency trader with Able Alpha Trading. She says high-frequency programs are designed to spot bargains. And when they did yesterday, they started buying again.

Irene Aldridge: The market recovered very quickly. And I think that’s the strength of high-frequency trading strategies, that actually identified that this was a completely erroneous event, that should not have happened, and they just pushed the stocks back up.

Machines may come out of this looking better than humans. The SEC is investigating whether someone triggered the sell-off on purpose.

Meanwhile, members of Congress have called for an investigation into high-frequency trading. A House committee holds a hearing on the market mayhem early next week.

In New York, I’m Amy Scott for Marketplace.

Ryssdal: There was a moment there yesterday when it kind of looked like the wheels were coming off. Like it was September 2008 all over again, maybe worse. We asked around in Manhattan this morning to see how people were feeling a day after.

Mara Caruso: I wasn’t scared, I wasn’t panicked. I kinda knew that it was a mistake and that it was going to be hopefully corrected in some way.

Male Aquino: I just say, another fool just lost his money trusting somebody else with it.

Robert Locke: It’s ironic, because I pulled most of my money out of 401(k) at least, ever since Bernie Madoff did his little fun dance for us. And the irony was that yesterday I was thinking, “Maybe I should start putting at least 5 percent more in.” And I was like, “Nope, gonna wait, gonna wait.”

Ryssdal: Yeah, maybe not such a bad idea.

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