The world stock markets tumbled on Thursday mysterily. Many blamed Greece Debt Woes and Computer Trading Programs. Till now, traders and even the regulators are still parsing what indeed happened.

Below are the series of events on that day compiled by The Wall Street Journal which gives us the insights.

Shortly after 2 p.m., traders on the floor of the NYSE say, they noticed some wild moves in currency markets, and gold was ticking up. Stocks fell further.

Around 2:40 p.m., with the Dow Industrials down about 500 points, a big high-speed trading firm, Tradebot Systems Inc., stopped trading to limit its losses. Other high-speed firms also pulled back. These firms typically buy and sell when other investors need to trade, so their withdrawal could have primed the market for a fall.

Around the same time, the big P&G sell order hit the NYSE floor. It is not clear where the sell order came from and how big the order was. It overwhelmed available buy orders, traders say.
Because that order came amid the market selloff, a NYSE system kicked in that’s designed to slow trading when there’s a big move in a stock’s price or trading volume. That so-called liquidity replenishment point system stopped the NYSE’s electronic trading in some stocks, down-shifting into “slow” mode.

The system is supposed to allow designated market makers—human traders who work on the floor—to help bring order to the market. These traders are required to step in and buy or sell stocks when there are no other investors willing to make the trades.
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Starting at 2:45 and 52 seconds and continuing for nearly two minutes—an eternity in markets where millions of shares trade every second—no P&G trades were reported by NYSE. For about 80 seconds, not a single share of P&G stock traded through the Big Board.

Sell orders continued to flood into the NYSE. When the orders couldn’t be filled, they spilled into other electronic trading venues.

That created an overload of sell orders and caused temporary divergences in prices between stocks on the NYSE and other exchanges. Essentially, there were no buyers for many stocks, which allowed their prices to fall until a trade was done, in some cases to 1 cent.

During that time, P&G declined 35%, then began to rebound. At 2:47 and 42 seconds, the NYSE reported a new P&G trade at $56.27, just below where the stock was changing hands before the trading halt.

Meanwhile, the broad market was falling more than 100 points a minute.

“We were here and didn’t know what happened out there,” said Doreen M. Mogavero, president of Mogavero, Lee & Co., a floor broker. “We thought something horrific happened.”

Some traders say one culprit for the quick downdraft might have been a type of trade called an “intermarket sweep order,” or ISO. ISOs, which some studies say account for nearly half of all trades, send trades to whatever exchange that has the best price. The order can remain there until it is filled—even if that means the price falls to near zero.

A large number of stocks that plunged dramatically Thursday were ISO orders in which there were no apparent buyers, data shows.

Shares of consulting firm Accenture PLC fell from $41 at 2:30 p.m. to $32.62 at 2:47:46 when a trade was routed through NYSE Arca Exchange. Seconds later, at 2:47:50 p.m. an ISO trade cleared through Nasdaq at $5.54. Moments later, an ISO trade went through on Nasdaq at $3.04. The shares traded at a penny at 2:47:53 p.m.

You can read the full story here.

About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

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