On May/7th 2010 we experienced a micro crash at the NY stock exchange. The Dow lost 919 points over 1:40min time. It shortly recovered almost all it’s losses. Some stocks’ liquidity (Procter & Gamble, 3M, Accenture) almost completely dried up during this period, causing the value to tank. Accenture went literally to zero before rebounding.

The SEC has launched an investigation into what has caused the volatility and the crash. Many transactions have been undone by now, but not all.

When I first heard of the crash (I only learned about it the next day – hey it was so fast!), I thought to myself: wow, is some hacker testing a new virus, or is China or Russia is test driving new electronic warfare?  I didn’t want to believe that such a glitch could happen naturally in such a big and liquid trading system.

Initial analysis seems to suggest though, that the system is to blame, no attacker. Many hedge funds that provide much of the liquidity pulled to the sidelines and stopped trading, when volatility exceeded a certain threshold. That left a very small market for the many sellers and non-existent buyers – the stocks tanked.

That explanation is fine with me, as I’m not a big fan of conspiracy theories, but this incident was just screaming “foul”! Poor guys who had stop loss orders sitting on their positions, selling many stocks at a loss and not benefiting from the rebound…

Interesting times, no doubt!