The Day the Dow Dived

Amazingly, a week after the biggest market drop in history, nobody knows why

On May 6, at 2:45 p.m., billionaire industrialist Wilbur Ross was interviewing a job candidate in his 27th-floor office when his computer screen went all red. The Dow, which had opened the day above 10,800, began falling. It dropped, paused and then plunged monumentally, down past 10,400 and 10,000 and then 9,900, in a Newtonian whoosh. Ross, 72, asked his interviewee to step out. “Then we bought some Greek bonds, and we tried to buy some other things,” he said later, wearing a silk tie patterned with hot-air balloons. “After we put the orders in, I brought the young man back. Once you bought, you bought.”

The biggest intraday drop in the history of the Dow, nearly 1,000 points, didn’t happen because of a calamity: No monuments had been burned and not a single colossal European country had defaulted. It just came. And then it went. The Dow was up above 10,500 by the end of the afternoon, and then back to 10,800 on May 10, after a trillion-dollar bailout package for Greece was announced. “We’re on to the next freaky thing,” a banking executive said this week, less than seven days after the Great Fall.

Is a terrifying and bizarrely opaque 1,000-point free fall another thing that is just going to happen on Wall Street every now and then? If so, will we know why? More pointedly, have we learned anything from the terrifying and bizarrely opaque events of the past year and a half? “We hope to be able to provide investors and the public with more information soon on the events that may have contributed to this volatility,” the Securities Exchange Commission chairman, Mary Schapiro, told a Congressional subcommittee on May 11, “but we should recognize that it will take time to fully analyze the data.” The night before, in a corner of the joint book party he threw for the scholars Ian Bremmer and Nouriel Roubini, hedge fund manager Kenneth Griffin did not want to bother parsing the stock market’s Thursday collapse. “Why did it fall on Wednesday? Why did it fall on Friday?” said Griffin, who is 68 slots ahead of Ross on this year’s Forbes billionaires list. “People make up stories after the fact.”

James Gorman, Morgan Stanley’s new chief executive, was alone in his 40th-floor office after a Thursday lunch when he saw the market wobbling. He called Suzanne Charnas, his head of investor relations. “Oh, God, what’s happening?” they said. Gorman thought it must have been some kind of mistake.

Vikram Pandit was in a meeting at the Citigroup Center on East 53rd Street. Another executive interrupted with the news. The chief executive stayed to finish the meeting, and then he collected staff in his office to talk. Steve Schwarzman was at Blackstone’s annual conference with limited partners at the Waldorf Astoria. A senior executive at AIG had all-day meetings. “I was in a cocoon all day,” the executive said. “Sometimes it’s good to be in cocoon.”

At 2:30, just before the crash, a former principal at Long Term Capital Management was walking out of a lunch with a hedge fund manager when he saw that the Dow was down a couple of hundred of points. “Not your best,” he said. He went to another meeting, which lasted until 3:15, after the fall and rise. On his iPhone, he checked a couple of his stocks. One that normally trades for around $3.50 was down 20 cents. “And I took a look at the low, and the low was down 75 cents. And I said, ‘No, that’s a misprint. Then I looked at other stocks.’” He realized what had happened while standing in the street.

It was not particularly loud or chaotic at the suburban Kansas City headquarters of BATS, the third-largest exchange in the country, right behind New York’s and Nasdaq. “Is it Greece? What’s going on?” CEO Joe Ratterman asked aloud.

At Goldman Sachs, gossip was floating around the investment management division that Citigroup had caused the fall with some sort of mammoth trading error. Silly Citigroup! An executive at another bank heard the same thing and told a newspaper reporter. CNBC heard it, too, and put up a story saying that a Citi trader may have inadvertently pressed a “b” for billion, not a “m” for million, in a trade that may or may not have involved Procter & Gamble. This was given a name: It was called the fat-finger theory. And the fat-fingered investigation had a focus: CNBC said there was a strange sale of 16 billion E-mini S&P 500 futures, traded on the Chicago Mercantile Exchange.

In Chicago, alongside the S&P 500 futures pit, a 38-year-old squawk-box broadcaster named Ben Lichtenstein, a man with a stadium-size voice of gravel and amphetamines, narrated the dive as it happened. “Guys, this is probably the craziest I’ve seen it down here!” he shrieked. On a recording that was immediately passed around on websites like Zero Hedge, he narrated the fall number by number. It was pandemonium. “This will blow people out in a big way that you won’t even believe!” he screamed in between a stream of numbers. After work, he went to his daughter’s soccer practice, then his son’s baseball practice, and then went out with a client.

The next morning, the Chicago Mercantile Exchange confirmed that Citigroup’s activity did not appear to be irregular or unusual. And by late Friday, the Obama administration had sent out word that a fat finger did not, in fact, start the biggest collapse in Dow history.

So what did? Traders had been itchy about the Greek debt crisis and the British election—but nothing astounding had happened that afternoon with either. Was it hackers or terrorists? Schapiro said on May 11 that it didn’t look like it.

The New York Stock Exchange blamed Nasdaq. Nasdaq blamed the New York Stock Exchange. Then Nasdaq blamed the Chicago Mercantile Exchange.

Was it the machines? On May 7, both The Journal and The New York Times had articles about high-frequency trading, the gargantuan but relatively new industry that uses algorithms to buy and sell. When the market falls to a certain level, both articles said, high-speed firms’ computers are programmed to sell automatically to protect against more and more losses. The firm Tradebot Systems, another enormous Kansas City–based firm, even said that its computers shut down entirely. A “computer glitch at even just one firm could trigger a wave of selling that sets off huge losses across financial markets,” a Journal story about the New York Stock Exchange’s upcoming 400,000-square-foot high-speed hub in suburban New Jersey said last year. The new hub was nicknamed Project Alpha.

By May 9, Sen. Chris Dodd, D-Conn, was on Face the Nation, complaining about “very fancy computers that can move in microseconds.” At the book party the next night, Griffin, the hedge fund manager, held up a glass of champagne with Maria Bartiromo to toast the Bremmer and Roubini books. “I think that it’s much easier,” he said in a conversation afterward, “to try and blame faceless computers.” The next day, another Journal article said that a $7.5 million trade for 50,000 options contracts from a hedge fund advised by Nassim Taleb, famous for the book Black Swan: The Impact of the Highly Improbable (Random House, 2007), “may have played a key role in the stock-market collapse.” It did not mention that the paperback version of Taleb’s book was released that morning.

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