5 things we still don't know about the market plunge

By Heidi N. Moore
Sunday, May 16, 2010

On Tuesday, the House Financial Services Committee held a hearing to find out what happened May 6 to send the Dow Jones industrial average diving nearly 1,000 points in a matter of minutes.

Here's what we learned: There was no one and nothing to blame. We were led to believe that everyone and everything was doing its job and that the market crash was an effect of too much efficiency.

The truth of what happened will remain buried among records of billions of Thursday trades. The New York Stock Exchange and Nasdaq, unable to publicly explain the cause, chose a "kill them all and let God sort them out" approach, canceling thousands of trades. To solve the issue, the exchanges will use the same approach, imposing circuit breakers on everyone. The theme of the hearings was unsatisfying: All for one, and one for all.

The days after the plunge were plagued with conflicting news reports, widespread suspicion about the power of computers, allegations of cyberterrorism, and other species of rampant theorizing -- all great material for conspiracy theorists and fans of "The Matrix," but not as great for people trying to piece together why the markets spiraled out of control.

Five mysteries remain surrounding the market rout.

1. What caused it?

It is surprising that this mystery was not solved quickly, considering that the New York Stock Exchange, Nasdaq and the "dark pools" all run mostly on computers, which should make it easy to scan for an errant trade or evidence of a glitch. Almost everyone agrees that, at some point, computers programmed to trade at certain prices took over and magnified the problem. But as a Wall Street Journal headline so eloquently put it, "regulators can't name cause of market slide."

Worse than not knowing: the vastly conflicting accounts. The only real piece of information after five days of investigations was this: It probably started with "aberrations" in Chicago. The Chicago Mercantile Exchange, however, said it recorded no glitches or unusual activity. The White House doesn't know what caused it, either, but is somehow sure it wasn't a cyberattack.

Initially, rumors held that a trader (in Chicago, perhaps) mistakenly sold off an unusually large number of "e-minis," a type of futures based on the Standard & Poor's 500-stock index. During the hearings, Commodity Futures Trading Commission head Gary Gensler said that there were 250 trades in e-minis. Only one trade, however, was selling for a full 20 minutes -- from 2:32 p.m. to 2:50 p.m., accounting for 9 percent of all of the volume in e-minis. Yet Securities and Exchange Commission Mary Schapiro insisted that a "fat finger," or single mistaken trader, could not have caused the crash. The e-mini case sounds compelling, even so.

Unfortunately, in a vacuum, every case sounds compelling. The Wall Street Journal took a stab at creating a thorough forensic timeline and traced it back to several big trades in Procter & Gamble stock.

But later, "government officials" and those "familiar with the investigation" told the New York Times that trading in Procter & Gamble was almost certainly not the cause. Similarly, Politico reported that the e-mini explanation was in vogue with regulators. Later, the Journal theorized that a hedge fund associated with "Black Swan" author Nassim Taleb caused the crash. Few in the markets embraced the all-too-poetic explanation.

By Friday, reports emerged that Waddell & Reed, a brokerage and mutual-fund firm in Kansas, was identified as the mystery trader that sold a large order of e-mini contracts during the market plunge. However, the impact the trading in e-minis had on stock prices during the plunge remains unclear.

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