Did a 'fat finger' set off the dizzying market free-fall?

Analysts believe that this week's dizzying stock market free-fall was likely the result of a perfectly timed combination of skittish investors, automated trading programs and fears about the global economic recovery.

All set off by an unfortunate typo by one Wall Street trader, who apparently typed in "billions" instead of "millions" on a stock sale order and set off a half-hour of chaos that spread from the New York exchange to markets around the world.

"It was really incredible to see," Colin Cieszynski, Head Market Analyst with CMC Markets Canada, told CTV News Channel. "It looks like somebody made a mistake and put in a much larger sell order than they meant to."

In a matter of minutes, New York's Dow Jones industrial average plunged nearly 1,000 points before pulling out of its dive, with some companies watching their stocks lose up to 60 per cent of their value.

CNBC attributed the error to a trade involving Procter & Gamble shares being sold by a stock trader. During a two-minute window, 16 billion future contracts in the stock were sold sending it plummeting nearly 37 per cent lower to $39.37.

The Nasdaq and New York Stock Exchange took the unusual step of declaring that they would cancel some trades that took place during the height of the sell off.

Cieszynski said the initial mistake was likely exaggerated by computerized trading programs at large brokerages, which automatically sell or buy stock when it hits certain prices.

Combined with market jitters over unrest in Greece and worry over the European debt crisis in general, that set the stage for a wide-scale panic, he said.

But other market watchers believe the causes of the selling run much deeper than one or two trading typos.

"What's been going on isn't just due to ‘fat fingers' or trading errors," David Watt, senior fixed income and currency strategist at RBC Dominion Securities, said in an interview with CTV.ca. "Mistakes like that happen all the time. They're good for a laugh, then the market moves on … but this isn't a healthy, normal market."

Watt said the trading mistake was just the spark that set off a fire sale in stock markets already worried by the Greek debt crisis and the lingering effects of the recession.

"The market was a tinderbox anyway," Watt said. "Whether this one mistake set it off or not, it was still going to burn."

"Markets were already stressed, this was just the last in a combination of factors that set them off into risk aversion and selling off."

Aron Gampel, an economist with Scotiabank, told Canada AM that investors are clearly nervous.

"I'll bet there are a lot of worry beads out right now that are being fondled," he said. "We've had these market freefalls in the past, but this was a huge one and it comes at a very sensitive time, when investors around the world are concerned about the extent of the recovery and of course the debt problems … in Greece and other countries in the European sphere."

He believes the market will recover quickly, but the underlying nervousness will not go away anytime soon.

"But I think confidence will be restored … I think a lot of this has been exaggerated, but there's a lot of nervousness out there."

The U.S. Treasury and exchange authorities are investigating Thursday's sudden market plunge and whether or not a computer "glitch" was responsible.

Canada's stock market trading regulator is also looking into the violent drop in share prices but a spokesman says no decision has been made on cancelling trades en masse as is happening in the U.S.

The Investment Industry Regulatory Organization of Canada, which oversees trading on Canadian stock markets, is still reviewing Thursday's events, said spokesman David Thomas.

Although markets recovered about two-thirds of the value lost Thursday, investors continued to sell heavily Friday morning, despite strong April job growth in North America that came in far above expectations.

Toronto Stock Exchange commodity stocks suffered as investors continued to buy into the safe haven of the U.S. dollar, fearful that the Greek debt crisis will spread to countries such as Portugal and Spain. Investors also sold bank stocks as worries about tighter credit conditions mount.

CTV.ca News Staff