Thursday, March 01, 2007

The Day the Dow Stood Still.......

I just happened to be home the afternoon of Tuesday, Feb 27th, when the "glitch" on the big board on wall street transpired. ABC online tells a good accounting of events:

Feb. 28, 2007 — We live in an age when money just isn't what it used to be. Today, trillions of dollars move around the globe each day not as paper currency in armored cars but as little bits — digital ones and zeros — flying through cyberspace.

It's great when it comes to speed. Whether you're a hedge-fund manager buying millions of dollars worth of stock in a few minutes or an average Joe withdrawing $20 from an ATM far from home, you enjoy the benefits of electronic transactions.

But the digital dollar age comes with some pitfalls that weren't big concerns in the past.
What happens if one of those computers moving money across a wire puts a decimal point in the wrong place, forgets how to do basic math for a few seconds or just isn't getting the information it needs to do its job?

The world found out yesterday.

But yesterday, starting at about 1:50 p.m. the lights were being fed numbers that just weren't right.

Dow Jones says that unusually heavy trading of the 30 component stocks that make up the Dow caused a 70-minute lag in correctly calculating the value of the index. Their main computer system wasn't getting what it needed to put the "real" numbers up there on the Big Board.
As one might imagine, a 70-minute lag in the era of fast electronic trading is a big problem. Especially on a day when the market is teetering on the precipice of a notably bad move down.

(This 70-minute lag is where I borrowed the title from the 1951 movie classic titled "The Day the Earth Stood Still"

As one might imagine, a 70-minute lag in the era of fast electronic trading is a big problem. Especially on a day when the market is teetering on the precipice of a notably bad move down.
When Dow Jones figured out what was happening — they weren't getting the values of the underlying component stocks in a timely manner — they switched to a backup system that was getting it right. That happened at 2:57 p.m. The rest is history.

In just three minutes the Dow fell by more than 240 points.

Jaws dropped on the floor of the New York Stock Exchange and in newsrooms around the country. What was happening? A market crash?

The answers weren't clear, but traders did what they do best: react, and fast.

They started placing sell orders, trying to get out in front of a stock plunge no one really understood.

They wanted to keep their precious ones and zeros, and to do that they needed to turn them from electronic shares of stock into electronic dollars right away.

"This switch-over caused prices that were received during the latency period to be processed all at once, bringing the index immediately in line with its underlying component stocks," says a press release issued by Dow Jones.

The almost instantaneous drop — a compression of all the selling that had happened in the previous 70 minutes — triggered even more selling.

It was a snowball effect, where billions of dollars in stock value vanished over the cliff in the last hour of the trading day.

As luck has it, trading days end, even in an electronic age when computers could be pushing ones and zeros 24 hours a day.

When the dust settled, traders had fought back from the big 546-point loss that was the day's low point.

And a little bit after the closing bell had sounded — boos echoing around the floor of the New York Stock Exchange — Dow Jones publicly said it had made a mistake and "is continuing to investigate the latency issue to correct the root cause of the problem."

Today the backup system that got turned on yesterday is feeding the lights at the Big Board.

I would guess that all them "boos" on the floor were for the 240-point glitch more than anything else. And them boys on the floor probably haven't had to work so hard in such a short time. How many got caught with their proverbial pants down........?

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