Dow Jones Plunge Fueled by Overwhelmed Computers

cloudscout writes "The Dow Jones Industrial Average dropped over 400 points today. While there were various valid financial reasons for such a decline, some of the blame is being placed on computer systems that couldn't keep up with the abnormally high volume at the New York Stock Exchange and the resulting tremor as they switched over to a backup system."

Comments

Fueled nothing

[AlphaNuRho]

I don't see how you could say that the computer problem fueled the plunge. My understanding of the events is that the only problem was with the system that calculated the Dow Jones Industrial Average Index (the number that is around 12,200). There wasn't a backup or delay in execution of trades or anything like that. The decline was real, but it was spread out over an hour instead of the 2 minutes reflected by the DJIA.

Traders still bought and sold stocks at their real value in real time. The calculation of the sum of their activity was the only thing delayed.

not quite

[flynt]

The computer systems weren't responsible for the overall drop, but rather the rate of the drop during the few minutes of switching over to the backup computers. This queued up trades, and at the current volume of the switchover, caused a large drop when they caught up. At least that's how I understand it.

Re:Just like the computers in 1929!

[UbuntuDupe]

wonder what the reactions would have been like if a "computer glitch" knocked the thing up 500 points instead of down.

Um ... *pulls aside*

You mean like what happened two weeks ago?

Editors? We don't need no stinking editors.

[dougman]

The DOW is up today. Can't you at least get the most basic facts right? The drop was yesterday.

Re:I have to wonder if this is spam related?

[gunnk]

From what I read (NY Times, I believe) the system didn't really have a big an impact as some headlines would lead you to believe.

Apparently the system that computes and displays the current Dow couldn't keep up with the systems that process the transactions when the number of transactions became very large. The display system caught up a bit later making it *appear* that the market at suddenly dropped something like 250 points in a few seconds.

In reality, the decline was fast but steady. It was just the exchange's version of "Damn lag!"

Re:I have to wonder if this is spam related?

[LGV]

All of the stock spam I get is for companies that don't trade on the NYSE or NASDAQ, it's for much, much, much smaller companies that trade on other exchanges. The companies that make up the Dow Jones average (30 of them) are way too heavily traded to be swayed by pump and dump spam, so they don't bother.

Re:I have to wonder if this is spam related?

[Jonny do good]

The drop was really fueled by a number of causes. China's 9% decline the night before was the primary trigger. Sub-prime loans have been leading to trouble for a number of firms lately with the housing decline fueling those problems. The market has been in bull form for quite some time with no corrections leading to a large number of stock prices not supported by their fundamentals. The durable goods sales reports are expected to show under 3% growth when it has been up in the 4% range and this always spooks investors. Any economic indicators showing any sign of change spark massive changes on the market.

The computer problems experienced were really just a lag between the DJIA being calculated and the massive volume of trades being made. Individual stock prices were being reported correctly but the index wasn't keeping up. When the computers caught up they did it over a single minute dropping about 300 points while in reality by the time the index caught up the market had started to rebound a bit. All of the value stock buyers saw the deals becoming available when the landslide hit and started buying a bit. Kind of like today, the market is rebounding because many are looking at stocks that were overpriced yesterday and thinking they are cheap. It's not really as big of deal as the press makes it out to seem. It's not like the '87 crash where 500 points was like 20% of the market. 500 points off th dow is under 4%.

Another trigger for the sudden decline could have been the headline on The Drudge Report (linking to the New York Times article by the same headline) stated that Greespan predicted an imminent recession when his words were as they always have been and that people should be carefull because the economy has been growing for longer than the average growth cycle by about 12 months. Greenspan didn't say anything about a recession being imminent.

Re:Blaming?

[Mr Z]

I think he was referring to the ginormous cliff that happened at almost precisely 3PM. Take a look.

Re:I'm actually suprised

[chad.koehler]

Data rates have doubled at the exchanges in the recent past, and they are likely to double again the the near future. Keeping ahead of this curve is not as easy as one might think...

Just one stock for instance, APPL will have millions of transactions in a single days trading... Including just trades and quotes you can see close to 100Mb of activity for a single symbol in a day.

We are constantly trying to increase capacity, but we're near a point where the only meaningful upgrades for capacity planning are new hardware. To top this off,most of the downstream (client side) applications are limited not by the hardware but by the available bandwidth.

Re:Blaming?

[Anonymous Coward]

This is referring specifically to the 200 point drop which happened almost instantly. The overall drop was no big deal percentage wise. The 200 point near-instant drop was caused by a computer error. The main system was lagging so they switched to a backup system, this caused about a half hours worth of data to get processed all at once. At the time no one knew what was happening though and were appropriately freaked out.

The Dow's technical glitch, dissected

[rrohbeck]

http://money.cnn.com/2007/02/28/markets/tech_glitc h/index.htm

The publisher of the Dow industrials said that a system problem starting at 1:50 p.m. ET on Tuesday, amid unusually heavy trading volume, caused a 70-minute lag during which the value of the market measure lagged the declines in the underlying stocks.

The subsequent downward spike in the Dow occurred when the problem was corrected as the company switched to its backup system at around 3 p.m.

Just before the switch, the Dow was showing about a 160-point drop. But then the blue-chip barometer appeared to tumble some 200 points in the blink of an eye as the newly available data was correctly reflected in the average.

Re:Blaming?

[Anonymous Coward]

From Frederick Lewis Allen's Only Yesterday , a fascinating history of the 1920s:

Once more the ticker dropped ridiculously far behind, the lights in the brokers' offices and the banks burned till dawn, and the telegraph companies distributed thousands of margin calls and requests for more collateral to back up loans at the banks. Bankers, brokers, clerks, messengers were almost at end of their strength; for days and nights they had been driving themselves to keep pace with the most terrific volume of business that had ever descended upon them. It did not seem as if they could stand it much longer. But the worst was still ahead. It came the next day, Tuesday, October 29th.

The big gong had hardly sounded in the great hall of the Exchange at ten o'clock Tuesday morning before the storm broke in full force. Huge blocks of stock were thrown upon the market for what they would bring. Five thousand shares; ten thousand shares appeared at a time on the laboring ticker at fearful recessions in price. Not only were innumerable small traders being sold out, but big ones, too, protagonists of the new economic era who a few weeks before had counted them. selves millionaires. Again and again the specialist in a stock would find himself surrounded by brokers fighting to sell--and nobody at all even thinking of buying. To give one single example: during the bull market the common stock of the White Sewing Machine Company had gone as high as 48; on Monday, October 28th, it had closed at 11 1/8. On that black Tuesday, somebody--a clever messenger boy for the Exchange, it was rumored--had the bright idea of putting in an order to buy at 1--and in the temporarily complete absence of other bids he actually got his stock for a dollar a share! The scene on the floor was chaotic. Despite the jamming of the Communication system, orders to buy and sell-mostly to sell--came in faster than human beings could possibly handle them; it was on that day that an exhausted broker, at the close of the session, found a large waste-basket which he had stuffed with orders to be executed and had carefully set aside for safekeeping-and then had completely forgotten. Within half an hour of the Opening the volume of trading had passed three million shares, by twelve o'clock it had passed eight million, by half-past one it had passed twelve Million, and when the closing gong brought the day's madness to an end the gigantic record of 16,410,030 shares had been set. Toward the close there was a rally, but by that time the average prices of fifty leading stocks, as compiled by the New York Times, had fallen nearly forty points. Meanwhile there was a near-panic in-other markets--the foreign stock exchanges, the lesser American exchanges, the grain market.

Re:NYSE: Microsoft (R) powered (R)

[Anonymous Coward]

Actually, SQL Server 2005 is used by NASDAQ, not the NYSE - they are two completely different trading systems. The Dow Jones is an index of select stock listed on the NYSE.
The machines that calculate the Dow Jones Industrial Average are IBM hardware running Unix.
SQL Server running NASDAQ: http://www.windowsfs.com/eNews/tabid/112/articleTy pe/ArticleView/articleId/933/Securities-NASDAQ-Mig rates-to-SQL-Server-2005.aspx
IBM Unix Machines running NYSE and calculating the Dow Jones, as pointed out by another poster: http://www-03.ibm.com/industries/financialservices /doc/content/news/pressrelease/1567015103.html

Australia also in the firing line

[AcidAUS]

Similar issues happened in Australia - the financial services regulator is investigating whether the online share brokers are liable. http://www.smh.com.au/news/business/watchdog-probe s-share-trade-meltdown/2007/03/01/1172338759235.ht ml