Congress is holding hearings about the May 6th stock market plunge, when share prices fell 1000 points in minutes. The SEC has summoned exchange officials to Washington to explain the event, the largest one-day drop in Wall Street history.
What caused the sudden sell-off? The Typo Theory holds that the panic started when a Citigroup trader typed a “B” instead of an “M” on his computer, selling $16 billion in P&G shares instead of a mere $16 million. The huge transaction triggered automated trading programs at all brokerages and made things much worse in minutes.
Unrelated world events were first said to have caused the drop and conspiracy theorists soon chimed in, but most sources believe that the initial data entry error caused the computer-driven, snowballing sell-off.
How can such catastrophes be avoided? Some authorities want to eliminate the automated “high-frequency trading” programs used by brokerages or put automatic blowout protectors (“trading curbs”) on them. We have a simpler solution: just move the “B” and “M” farther apart on stock brokers’ computer keyboards.
Image by Mike Licht. Download a copy here. Creative Commons license; credit Mike Licht, NotionsCapital.com
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Tags: algorithmic trading, automated trading, flash crash, HFT, high-frequency trading, market plunge, May 6, stock market, Wall Street
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