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So what happened last week to cause the Dow to fall nearly 1000 points in the space of about 15 minutes? The first theory was that it was all based on a typo: CNBC reported that a trader at Citigroup put in an order to sell several million shares, but accidentally requested the sale of several billion instead. The massive number of shares flooding the market then supposedly caused the momentary panic.
In addition to the so-called “fat finger” theory, there are other speculations:
* Excessive trading in Procter & Gamble – which temporarily lost 37 percent of its value – caused the drop. One theory has it that the billion-share “fat fingers” trade was in P&G.
* Some kind of hackers or terrorists got into the New York Stock Exchange computers. SEC chief Mary Schapiro officially denied this rumor.
* The E-Mini S&P 500 futures market caused the plunge. These are highly liquid options contracts based on the S&P 500, and are basically bets on the value of where the S&P will be in June. A Nasdaq official has said that speculation in E-Minis was “one factor” in the crash.
The real cause could be some combination of these, or something else altogether. No matter what triggered the drop, though, the important thing is what happened afterward. Traders recognized that the market was suddenly undervalued, and began buying up shares as fast as they could. The sudden plunge was certainly newsworthy, but in the larger scheme of things, what is most significant is that the market corrected itself quickly.