The Drop

We'll have a much better picture in the next few days, but for 90 minutes today on Wall Street, there was quite a bit of anxiety as we watched the Dow plunge almost 1000 points. There was talk of the Greek crisis, and the ECB and rates, but it was the specter of that graph on CNBC with the steep ski slope that really made us gasp. Could it be?

Could it be that the contagion that is Greece had just made the US markets go into free fall? Had we not learned anything about systemic risk in 2008? Was there anything to keep us from going into a free fall? Of course not - there's been no legislation to make any changes. The legislation that would have gone into effect (but did not today) was the circuit breaker rule (for when the market drops 10%) that would have given the markets a breather and allowed them to assess what was going on in the event of a rapid drop. That was enacted after the Market Crash of 1987.

But no, it was not in free fall. We watched with open mouths as the Dow, again, spectacularly, shot right back up 500 points in several minutes. Anyone that had been around in 1987 knew what this was too - program trading. No one person can trade in that volume - only machines can. There was talk later of a possible person involved in making a mistake with an order, and maybe that will turn out to be true (person error - an operational risk - not necessarily systemic risk!), but the sweep of the trading wave was awesome to watch.

What will we learn from May 6, 2010? Time will tell.