Clues Emerge on Selloff

May 8, 2010, 1:14 PM ET

By Carolyn Cui, Scott Patterson and Tom Lauricella

As traders continued to sift through the dust of Thursday’s dramatic selloff, clues emerged about factors that played a part in the downdraft.

Many on Wall Street focused on a series of trades surrounding Procter & Gamble, a component of the Dow Jones Industrial Average.

Whether the trading in P&G triggered the sharp selloff that brought the Dow down by about 1,000 points, or was just one piece in a complex web of causes was unclear.

But the P&G trades put a spotlight on dangerous glitches in how today’s high-speed electronic market functions.

The mayhem began around 2:40 p.m., when a series of sell orders for P&G came to the NYSE floor, trumping the available buy orders, the traders say.

With those orders coming in amid the broad market selloff, a system at the NYSE designed to slow down trade when a stock becomes volatile kicked in. The so-called liquidity replenishment point system stopped the NYSE’s electronic trading in some stocks, down-shifting into “slow” mode.

That is supposed to allow for designated market makers, human traders who work on the floor of the exchange, to help bring order to the market.

Barclays Capital, which is the designated market maker for P&G, paused for about a minute, trying to bring buyers and sellers together, floor traders said. However, these sell orders, which couldn’t be filled at the NYSE, spilled into other electronic venues, creating an overload of sell orders and causing temporary divergences in prices between stocks on the NYSE and other exchanges. Essentially, liquidity for many stocks dried up.

The tumbling blue-chip helped drag down the Dow index.

At 2:45 pm, numerous P&G trades clocked through the order systems of multiple exchanges around $59.66 per share. A minute later its price started to fall, dropping quickly to $57.36 at exactly 2:46 and then to $53.51 just 30 seconds later.

Then, suddenly, a portion of the big sell order that had been bouncing around the various exchanges changed hands at $39.37 in about 11 blocks on the Nasdaq exchange. The chaos the ensued as the market tumbled triggered a cascade of sell orders in other stocks. On the exchange floor, traders scrambled to figure out what was happening.

Jonathan Corpina, partner and head of floor trader at Meridian Equity Partners, rushed to the center of the exchange — the posts — where
market makers were trying to see how big the trade flows were.

“We were trying to gather as much information as we could,” he said. The floor suddenly got deafening loud, with phones ringing, instant messages popping out and traders screaming.

“We were here and didn’t know what happened out there. We thought something horrific happened,” said Doreen M. Mogavero, president of Mogavero, Lee & Co., a floor broker.