May 6. 2010: "The Black Thursday"

The Dow Jones Industrial plunged nearly 1000 point, erasing more than 1 trillion dollar of market value,  in the biggest U.S. stock market drop since the crash of 1987, known as “The Black Monday”.  The index recovered about 600 points before ending down3,2% – still the largest dive since February last year. Regulators are now investigating possible irregular trading related to the collapse. Nasdaq suspends trades.

“This is a much bigger crisis than the Lehman one, but the market has yet to recognize it.”

Suki Mann

The Dow average ended down 347.8 points, or 3.2 percent, at 10,520.32 at the 5:50 p.m. in New York. The Standard & Poor’s 500 Index fell as much as 8.6 percent, its biggest intraday plunge since December 2008, before closing down 3.2 percent at 1,128.15. It was the biggest percentage drop on a closing basis since April 20, 2009, for both measures, Bloomberg reports.

According to The Wall Street Journal, The Dow had its worst one-day drop since February 2009.

“If this market gets back to down 2% to 3% for the day…that will be one wild ride,” says Jesse Litvak, a mortgage trader at Jeffries & Co.

“All credit is clearly getting hit, but look at the buying that came in when stocks were down by 1000 points.”

Litvak says to Structured Finance News that nothing was trading in the residential space and that the ABX.HE Index was getting hit. He added that the market could take some solace if the day ends with the Dow dipping only 250 to 300 points.

This comes as Europe prepares to vote for a bill that would grant Greece billions of Euros of in emergency loans.

Athens is set to get a €22.4 billion ($28.5 billion) bailout by euro zone nations and the International Monetary Fund (IMF).

Bigger Than The Lehman-Collapse

Suki Mann,  a credit strategist at Societe Generale, says that the bailout news seems to have passed without having the desired impact.

“SovX continues to test and re-test wides, and the iTraxx indices have fallen out of bed as the financials index gets battered,” Mann says. “And cash, in spread terms, has given up all the gains it had worked so hard to muster since January.”

However, the entry point she explained is very different to that than that existed after the Lehman Brothers collapse. She says, “yields are substantially lower and the case for cash is much stronger as the carry is not so negative now.”

“This is a much bigger crisis than the Lehman one, but the market has yet to recognize it,” Mann says.

“And just like the U.S. authorities before it, the European authorities are way behind the curve. In such cases, usually ‘cash is king’ while we ride out the storm — and yields are so low that the missed opportunity cost is reduced. But this is not quite the situation now, simply because the case for credit remains compelling given the wider sovereign-related situations.”

Nasdaq Suspends Trades

Nasdaq OMX Group Inc. said it will cancel all trades of stocks at prices that were 60 percent above or below the last price at 2:40 p.m. or immediately prior, Bloomberg reports.

The exchange operator said in a statement it will cancel all trades “greater than or less than 60 percent away from the consolidated last print in that security at 14:40:00 or immediately prior.”

Nasdaq said it coordinated the decision with all other exchanges.

Trading To Be Investigated

Selling accelerated late in the day due to a wave of automated sell orders that turned an ugly drop into full-blown market washout.

At its afternoon low the Dow Jones Industrial Average was down almost 1,000 points, hurt by sharp drops in Procter & Gamble, 3M and other companies that traders said were subject to heavy selling by so-called black boxes, or automated trading systems, according to The Wall Street Journal.

“You don’t see a blue-chip stock like this go down 20 points with no news,” says Frank Ingarra, co-portfolio manager at Hennessy Funds, a quantitative firm that deals with program traders. “All of the algorithms kicked in from this errant thing.”

The Big Board also noted that 3M fell below its circuit-breaker level.

Several market watchers said they heard a major firm may have accidentally released an errant program, where a trader accidentally placed an order to sell $16 billion, instead of $16 million, worth of e-minis, the futures contracts tied to equity indexes.

E-minis are traded at the Chicago Mercantile Exchange. Allan Schoenberg, a spokesman for CME Group, says the exchange was examining trades.

“Whenever the market moves up or down like the swings we saw today, we take a look to make sure everything’s operating properly. That’s exactly what we’re doing now,” Mr. Schoenberg says. “If the exchange finds anything amiss, it would report its finding on its website.”

Traders also also noticed errant trades among exchange-traded funds, including the iShares Russell 1000 Value Index Fund, which dropped from close to $60.00 to 7.5 cents.

“These ETFs traded to lows that are not mathematically correct,” he says.

New York Stock Exchange spokesman Rich Adamonis says “there were a number of erroneous trades” during the plunge. The NYSE told CNBC that there were no system errors as speculation of bad trades swirled through the market.

Citigroup Inc. says it found “no evidence” of erroneous trades after CNBC said the bank made a potentially bad transaction amid the Dow’s plunge of as much as 9.2 percent, its biggest intraday drop since Oct. 19, 1987 – also known as “The Black Monday”.

CNBC cited “multiple sources.”

Related by the Econotwist:

European Banks Loaded With Greek Debt

Gerald Celente: “The Great Crash Has Occurred”

Bail Out Pyramid?

Athens: Banks On Fire – Thee Dead

“The Economics Of War Unfolding Now”

ECB Makes Rating Agencies Irrelevant

Greek Protesters Start Blowing Up Banks

“We Stand At The Brink Of The Next Great Crisis”

Living In A Derivative World

77% of Senior Bankers Expect Another Financial Crisis by 2015

Roubini: “The Worst Is Yet To Come”

Robert Schiller: – Recovery is just luck

2010 Analysis: The Road to Disaster


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