MFG 2.0

What Really Happened To P&G, Apple and 3M's Stock Yesterday

Something happened around 3 PM today that caused blue chip stocks like Proctor & Gamble, Apple and 3M to take an unexplained (and completely unwarranted, as far as I can tell from the reports) nosedive in value.
http://i2.cdn.turner.com/money/2010/05/06/markets/procter_and_gamble_stock/chart_procter_gamble.top.gif

Of course the chattering heads on the financial channels go on and on about how the Greek debet crisis is affecting the markets and other irrelevancies, in order to make themselves sound knowledgeable and keep us thinking that this is a rational system. The latest news report, as of midnight, is that this massive loss might have been due to a trading error at Citi.

The sources told ABC News that the possible error by Citi involved what was supposed to be a $16 million trade on an S&P 500 futures-linked contract. The trade was entered in billions instead, they said.

It seems ridiculous to ask at this point in recent economic history, but are any there quality procedures in place in the world of finance?

Well, as it turns out, there is at least one in place on the stock market side -- and interestingly enough, it relies on good, old-fashioned human reasoning to keep the trading algorithms from driving a stock price into the ground.

As other exchanges were in discussions over whether to cancel trades in a number of stocks including Procter & Gamble Co. that traded erratically Thursday afternoon, the New York Stock Exchange touted its move to switch the trading in P&G to a human auction to prevent things from spiraling out of control . . .But because the stock fell below a key circuit-breaker level . . .the exchange stopped its own electronic trading in the stock briefly to go into "slow" mode. Under that mode, the designated market makers on the NYSE floor are given an opportunity to come in on the other side of an order at a price they have time to think about.

In this case, there was a sell order for P&G. Lou Pastina, executive vice president of floor operations for NYSE, said the auction ran for about a minute and 20 seconds, and then the trade went through at a price of $56 even though at that time the stock was trading far lower elsewhere.

Turns out that all the computing power that money can buy can destroy a lot of wealth pretty quickly, so the NYSE brings a knowledgeable person to pinch hit in a pinch. Smart move indeed.

TAGS: Innovation
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