1000 point drop was it the Plunge Protection Team kicking in, or was it a computer glitch

Who is the Plunge Protection Team?

So I decided to tackle a topic I don't normally write on but due to the events of Yesterday (May 6th, 2010) I decided I would. This week the markets have been sliding across the board, from Europe, to Asia, and back here in the US. Due to various factors like Greece etc. However yesterday we were down close to 400 points, when all of a sudden the market dropped almost 1000 points in total from the previous close. Which is why I am going to write a little bit about the Plunge Protection Team (PPT) or as it is officially called the Working Group on Financial Markets.

The Working Group was created by President Ronald Reagan by Executive Order (12631) and is made up of the Secretary of the Treasury, Chairman of the Board of Governors of the Federal Reserve System (Fed), Chairman of the Security and Exchange Commission (SEC), and Chairman of the Commodity Futures Trading Commission (CFTC) or the designees.

The function is basically to maintain integrity, efficiency, and orderliness with in the US Markets. They were also tasked with two purposes, one is to study the major issues the events of October 19, 1987 and make recommendations. The second was to use existing laws and regulations, such as coordination, and contingency planning, that are appropriate to carry out the recommendations.

Finally it is administered with full authority under law of the member organizations I listed above. With funding set to come from the Department of the Treasury.

So what does this all mean?

Basically they're like the Medic for the US Markets. If we are in a major collapse then they kick in, or the things that they have introduced kick in to stem the flow of "blood" and stop the collapse of the market. The conspiracy theory claim that they inject money back in to the system, when it drops, other processes that they use are that if x market drops by a percent greater than say 5% then the market is closed for a period of time. If it goes even further when it is reopened then it automatically is closed for the day, and so on. I do not feel that they're in place to prop up the market but to make sure whatever decline that happens is orderly and not sudden. However after yesterday I'm not so sure.

So what happened yesterday?

A lot of people are still trying to figure it out; personally I think it was a computer glitch and not an issue of trader error. I'm going to probably be asking rhetorical questions as things do not quite add up, but it also makes it look like the PPT kicked in.

Let’s look at what actually happened.

“The Dow Jones Industrial Average plunged almost 1,000 points before trimming its drop and ended down 347.80 points, or 3.2 percent, at 10,520.32. About $700 billion of U.S. stock- market value was wiped out in less than 10 minutes, according to data compiled by Bloomberg." Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=a9aQCydv3ERE&pos=1

Almost immediately CNBC came up with this claim that a trader "Fat fingered" the keys pushed "B" for billions, and not "M" for millions.

"According to multiple sources, a trader entered a "b" for billion instead of an "m" for million in a trade possibly involving Procter & Gamble a component in the Dow. (CNBC's Jim Cramer noted suspicious price movement in P&G stock on air during the height of the market selloff. Sources tell CNBC the erroneous trade may have been made at Citigroup" Please not the time discrepancy in the dateline, this is simply because they updated the article with more information. Source: http://www.cnbc.com/id/36999483

This morning as they delve deeper into this they're finding out that nothing went wrong and that it may have been the computer models that caused this issue.

This is what the NYSE Euronext CEO had to say. Source: http://classic.cnbc.com/id/37004249

"NIEDERAUER: ... MY GUESS IS IF YOU WENT BACK AND REDID THE TAPE FOR THE TRADES THAT WE WOULD GUESS WILL BE TAKEN OFF THE DOW SHOULD NOT HAVE BEEN DOWN AS MUCH AS IT WAS DOWN BECAUSE ALL THAT VOLUME IN P&G DURING THAT PERIOD NONE OF THAT WAS HERE BECAUSE WE DIDN'T TRADE THE STOCK FOR 90 SECONDS.

BARTIROMO: SO YOU ARE SAYING THAT THE STOCK WAS CLOSED FOR 90 SECONDS"

So they shut down trading for 90 seconds.

Also in the transcript they discuss the computer model and how it automatically executes trades. However, this morning according to the Today show that the NYSE will be cancelling some of the major trades. This is a signature action of the PPT's protocols that are in place when something like this occurs. So my question here, was the approximately 1000 point drop the real drop, or was it the approximate 350?

Now I know markets are connected and things, but if this was just an error that occurred with one trade. Then the question is how did it affect multiple markets?

Lets look at an example of when the PPT alledgely kicks in so that the dicussion below makes some sense. (Figure 1) http://seekingalpha.com/article/43403-the-plunge-protection-team-exposed

P&G is traded on the NYSE, and is a one of the 30 stocks that make up the Dow Jones Industrial Average (Dow). This caused the Dow to drop dramatically, and I'm sure it set off sell orders on various stocks market wide. For example Intel Corp, is a Dow component, but that is traded on the NASDAQ. It is also a member of the S&P 500 index. So as you can see from the charts below they're all identical. (Insert Charts)

My comment here is that most likely if it was an erroneous trade that occurred, it would have been cancelled, and we should move on. However if that was the case why would the NYSE cancel trades? Source: http://www.foxbusiness.com/story/markets/nyse-nasdaq-cancel-trades-height-volatility-thursday/

Supposed to be a free and open market right?

I think this is where the PPT comes in to play, and you can see from the massive spike. This is obviously a systemic issue that occurred, and this is exactly what the PPT was specifically designed to address. It even affected the Chicago Mercantile Exchange where commodittes and bonds are traded.


Was the PPT at work?

I'd say yes to a degree, however reports from the previous day May 5th point to some interesting IT, Network issues that occurred with the markets.

"Network managers are being urged to run a series of checks on their routers and firewalls to ensure their users will still be able to connect to internet sites in the wake of a major change to the internet's domain name system next week." http://www.itnews.com.au/News/173412,warning-why-your-internet-might-fail-on-may-5.aspx

"The Nasdaq's automated dealer-to-dealer communications service, SelectNet, which is heavily relied on by brokerages and trading shops to execute trades in Nasdaq securities, wasn't working for the first half-hour of trading this morning.

On May 5, the world's top domain authorities (led by ICANN, the US Government and Verisign) will complete the first phase of the roll-out of DNSSEC (Domain Name System Security Extensions) across the 13 root servers that direct user requests to the relevant websites on the internet" http://www.thestreet.com/story/1451320/1/nasdaq-execution-system-restored-after-morning-technical-glitch.html

So was it a computer glitch, or did the PPT actually kick in?

I'll leave you with this article http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/2782157/Bush-convenes-Plunge-Protection-Team.html

And this, the real panic heard on the trading floor and not what you got from cnbc

As of publishing this article the market is now trading at approximately -200 points. Only a few hundred more points to go to reach the level that we hit yesterday.