“Three days after a major US stock index took a curiously large plunge in a matter of minutes, it is still unclear whether the culprit was an erroneous trade, a barrage of automated stock sales or something different. US regulators are investigating a drop of 587 points, or 5.6 per cent, in the Dow Jones Industrial Average between 2.40pm and 2.46pm in New York on Thursday. The index, a widely watched measure of the performance of large-company stock, recovered somewhat after the fall, ending the day 348 points lower at 10,520. But the drop pushed the Dow, which was already about 400 points down on Thursday afternoon, to one of its biggest intra-day losses since the Black Monday crash of October 1987,” Asa Fitch Reports From The National.

“Remember that all this is coming in the context of already an erosion in trust among the public in financial markets, and lots of regulatory fluidity,” Mohammed el Erian, the chief executive of Pimco, a major US asset management firm, told a Reuters television programme. “So this will add to both the mistrust in the street and to the desire to make sure that regulation is keeping up with the realities in the stock market.”

Fitch reports that, “The US Securities and Exchange Commission and the Commodities Futures Trading Commission said on Friday that they were “continuing to review the unusual trading activity that took place briefly yesterday afternoon to pinpoint its cause and contributing factors”. One theory had it that a trader at Citigroup (NYSE:C) made a so-called “fat-fingered” trade, accidentally ordering a sale of billions of dollars worth of Procter & Gamble shares when he meant to sell millions worth. Citigroup denied the suggestion, saying “… based on our review, rumours about a trading error by Citi are unfounded”. The US stock exchanges, for their part, said their trading systems were working properly, and there was no evidence that a technological problem led to the sell-off.”

Here are some more details on what Citigroup (NYSE:C) said:

Reuters reports that, “Citigroup Inc (NYSE:C) said there was no basis for rumors that it was responsible for a massive trading error that caused the markets to plunge on Thursday. Citi had been conducting an investigation into the rumors on Thursday, but said on Friday morning that its investigation had determined that the rumors were false.”

“Based on our review, rumors about a trading error by Citi are unfounded. It is troubling that inaccurate and unfounded rumors were spread as far as they were,” Citi spokeswoman Shannon Bell said in an email.

As investigations took place as to what triggered errant trades in individual stocks such as Proctor & Gamble Co. and Accenture a big focus was also put on what happened with ETFs and ETNs in the chaos. 

“Thursday’s market plunge that triggered errant trades in individual stocks such as Proctor & Gamble Co. (NYSE:PG)  and Accenture (NYSE:ACN) affected exchange-traded funds and notes as well. It wasn’t clear whether the errant trades were due to problems at the exchanges or with ETF and ETN market makers during the chaos Thursday afternoon. Since ETFs and ETNs trade like individual stocks on an exchange, there are specialist firms responsible for making orderly markets,” John Spence Reports From Market Watch.

Spence goes on to say, “One industry source said that the erroneous Thursday trades in ETFs and ETNs are in the process of being canceled and that performance figures as well as the daily highs and lows will be corrected as the fixes make their way through the system.”

Paul Justice, associate director of ETF research at Morningstar Inc., said in an interview that Thursday’s snafu could hurt the perception of exchange-traded products. One selling point of ETFs and ETNs is that investors can buy and sell them while markets are open. With sales and purchases of traditional mutual funds, investors get end-of-day prices. However, Justice said it would be wrong to blame the ETF structure for Thursday’s breakdown.” “There was no market volume to execute the trade,” he said. “If the market breaks, a delivery vehicle like the ETF will break, too. It was a problem with the entire system.”

“Based on conversations with industry insiders who didn’t want to be named, it appears some of the ETFs that were caught up in the maelstrom had positions in Procter & Gamble (NYSE:PG) , Accenture (NYSE:ACN) and other stocks that plummeted Thursday. In recent years, electronic trading and algorithms have increasingly taken the place of humans in making ETF markets. When a stock in the tracking index is trading abnormally, spreads may open up in ETFs. When the market went haywire on Thursday, spreads in ETFs that held Procter & Gamble and other plunging stocks widened so much “that you could drive a truck through them,” as one source put it. It took a few minutes for human hands to get back on the controls and spreads snapped back when markets realized the sky wasn’t falling,” Spence Reports.

“The whole thing is a reminder that the velocity of markets has increased so much in recent years,” one insider said

Here is a list of the securities subject to cancelled trades:

ETF BASIC NEWS