Remember back in May, when the Dow plunged almost 1000 points within the space of an hour? The official report as to the cause of that little episode came out last week. Here's what happened in a nutshell: A trader put out an order to sell more than $4 billion worth of S&P futures, without specifying a price at which to sell those futures, which would have smoothed the sale out over time. That put 75,000 E-Mini S&P futures on the market all at once. With all those shares coming quickly onto the market, to be sold at whatever price they could fetch, their price came down very rapidly.
That trade was made by an actual trader, but several automated trading programs picked up on the big sale and the price drop, and automatically followed suit. Those S&P futures are considered bellwethers for the stocks in the S&P 500, so when traders saw the futures plunging, many of them began selling off the underlying stocks as well.
Eventually, cooler heads prevailed, and the market quickly made back all those losses when people realized the drop had been caused by, essentially, nothing. The SEC hasn't yet decided if it needs to implement additional regulations to keep such plunges from happening in the future, although it has put circuit breakers on the market to halt or slow trades of any stock that moves more than 10 percent in a five-minute period.
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