Sotheby's and the Flash Crash

The stock market was the talk of the town (and the virtual towns across the Internets) yesterday. According to Bloomberg.com, automated "electronic trading" was to blame for what's being called a "flash crash," in which the Dow very quickly dropped nearly 1000 points but later, mostly, recovered:

Computerized trades sent to electronic networks turned an orderly stock market decline into a rout, according to Larry Leibowitz, the chief operating officer of NYSE Euronext. Nasdaq OMX Group Inc. canceled trades in 286 securities that rose or fell 60 percent or more.

While the first half of the Dow Jones Industrial Average’s 998.5-point intraday plunge probably reflected normal trading, the selloff snowballed because of orders sent to venues with no investors willing to match them, Leibowitz said in an interview on Bloomberg Television.

“If you look at the charts you can see fairly clearly where the trades came in,” he said from New York. “It’s that V-shaped drop where it came down and snapped right back up. You had some very high-cap stocks trading down 50 percent or large percentages in a split-instant because there really was no liquidity in electronic markets.”

As Rachel Maddow (not exactly my first source for Wall Street news, which tells you how widely the chatter on this had spread) noted last night, you also had some stocks trading down 100%, meaning that during the spike downward, their stocks were trading at $0...meaning they were free. Wahoo! With no money down---in fact, with no money at all--you too can be an instant industrialist!

As Rachel Maddow also noted, though, one company's stocks took a wildly different ride. That company is one I normally pay much more attention to than the ones who dropped to zero...but I'm kind of glad I missed what happened in real time. It would have been too surreal. Rachel explained:

At the same time that some companies were becoming free...the auction house Sotheby's, which has the stock price [ed: I think she meant stock "name", no?] BID, B.I.D., get it? Bid...Sotheby's...auction. Sotheby's started the day with its shares costing 34 dollars and something. Sotheby's ended the day with its stock costing 33 dollars. It's a drop, but it's no big whoop, right? It goes between 34 and 33 dollars. Whatever. Until you notice that in the middle of the day, at one point, the stock price of Sotheby's shares went to 100,000 dollars, per share. Which means that at some point today, Sotheby's went from being a company worth 2.2 billion dollars to being a company worth 6.8 trillion dollars. Which means, for a minute, that one company had a net worth of somewhere between the size of the entire economies of the United States and China. Congratulations Sotheby's.

Of course, even had anyone with significant amount of Sotheby's stock tried to cash in on the obvious glitch, they would have been sorely disappointed.

The New York Stock Exchange said on Thursday it would cancel all trades on its all-electronic trading platform NYSE Arca that were executed between 14:40 and 15:00 ET and that were more than 60 pct away from their last print at 14:40.

Indeed Sotheby's stock's official high price yesterday was $64.00. Still a bit more than it closed at, but not enough to make you the richest person in the history of...well, the universe I suspect.

The first thing I thought of when I heard of the flash crash and the decision to cancel all the trades during those moments of insanity was the plot of the Tom Clancy novel (I told you I have this inexplicable addiction to trashy spy stories) Debt of Honor in which an evil Japanese industrialist launches an attack on the US by first sending our stock market spiraling out of control via computer. People across the financial sector, unaware that the entire thing is being manipulated to make them panic, do just that and behave in ways they wouldn't have otherwise, selling like maniacs, and making matters worse. They eventually figure out it was an attack, but what can they do after zillions of trades? The story's protagonist realizes that if you simply cancel all the sales during that time, essentially rolling back the clock, you can start afresh, without the panic influencing everyone.

None of which is to say I'm suggesting the Stock Market got hacked yesterday. (It's just eerily similar.) And I can't quite believe the "fat finger" mistake rumor either, which goes that:

A trader at Citigroup, seeking to place an order for 16 million shares in a miniature exchange that mimics the performance of the Standard & Poor's 500 index, accidentally keyed in an order for 16 billion shares of the securities.

Citi said they found no evidence to support that rumor.

No, the electronic trading gone haywire theory seems the most solid, if still highly unsettling. But not to worry, our fearless lawmakers are on the case:

The market rout triggered scrutiny from lawmakers. U.S. Representative Paul Kanjorski, a Pennsylvania Democrat, set a May 11 hearing. U.S. Senator Ted Kaufman, a Delaware Democrat, questioned whether markets that increasingly rely on computer algorithms to execute thousands of transactions in seconds triggered false trades.

“This is unacceptable,” Kanjorski, who leads a House Financial Services subcommittee that oversees the SEC, said in a statement. “We cannot allow a technological error to spook the markets and cause panic.”

Apparently we're not able to stop it. Today's market should be interesting...even if it's entirely uneventful.