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Prosperity to Panic in 60 Seconds

Fri, 05/07/2010 - 7:49am

Luke Simpson LongBy LUKE SIMPSON, Associate Editor

Last week’s earnings reports for the big chemical companies were flush with big profits, signaling a turnaround for not only the industry, but the economy as a whole. Share prices shot up and things were looking rosy:

  • Dow Chemical’s first-quarter sales rose 48 percent.
  • DuPont announced first-quarter profits were up 15 percent, prompting the company to boost its 2010 earnings forecast.
  • Eastman Chemical’s earnings were 50 times higher than a year ago.

The next thing you know, the market goes into a freefall, dropping nearly 10 percent — the biggest point drop ever seen — before shooting back up about 7 percent.

I happened to be checking some of my shares when the you-know-what hit the fan. An indexed fund I bought into about a year ago was sitting pretty at about $52 a share until about 2:40 p.m. yesterday when it fell off a cliff to $0.13. Suffice it to say I was sweating.

Then just as quickly as it started, my fund was back up to $51. It’s hard to say exactly what happened, but it felt like the machines had taken over.

A lot of reports point to Procter & Gamble as a trigger for the collapse. The company’s well-liked shares have been steadily increasing above $60 for the last month, but suddenly dropped to $39.37.

Procter & Gamble’s management stated that it thinks the low share price was an error, leading to the question: Was it a computer glitch or the so-called “fat finger” — human error that resulted in a $16 billion sell order instead of the intended $16 million?

And how much of the subsequent drop-off was panic and how much resulted from the safety mechanisms built into trading programs, which are designed to sell a stock if it dips below a certain level?

The NASDAQ reported overnight that it will cancel trades that rose or fell more than 60 percent between 2:40 and 3 p.m., indicating that something less than legitimate was going on.

It wasn’t until I left work that the ridiculousness of the situation dawned on me. We now have a highly automated electronic trading system that can throw the entire market into chaos in 60 seconds flat.

I can handle the fact that the market and the “real economy” are often not in agreement, and I can even accept the fact that debt problems in a small pocket of Europe affect us the way they do, but I’ll never trust anything without a conscience, be it a computer or the greed-driven traders that program them.

Did you survive the crash of 2:45? Are we losing control of a system that is already too volatile? Send me an e-mail at luke.simpson@advantagemedia.com.

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