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For a while, it really felt like the end: the Katie-bar-the-door, stockpile canned food, buy gold, and head for the hills kind of end. For those who have blocked the event from their memory, it occurred on February 27 around 3 p.m. ET. The Dow Jones Industrial Average (DJIA), already down a crushing 300 points on the day, dropped a further 200 points in one, heart-attack-inducing, adrenalin-soaked minute. People talk about a market in free fall, but this was worse. Traders on Wall Street said they felt dizzy. For all people knew, we could be down 10 percent in the next instant. Almost as soon as "the drop" happened, speculation about what caused it spilled forth in the media. Most people blamed program trading, the computer-driven trades that are driven by technical trends. Others pointed at hedge funds (as people always do). Still others, like Jim Cramer, incredulously blamed ETFs. The truth, however, was much simpler. Dow Jones says that for the 70 minutes leading up to the 3 p.m. downdraft, the data it received from the New York Stock Exchange (NYSE) on prices for the DJIA components was incorrect. Essentially, the tremendous volume of trading that day overwhelmed the data feed. As a result, the reported DJIA value was incorrect; the real value of the index was much lower. Once Dow Jones realized the problem and switched to a backup data feed, it got the correct numbers and … wham! … the index was down 500 points. One quirk in the story: The Dow Diamonds ETF (AMEX: DIA) actually traded in line with the "real" value throughout the day. Chalk one up for ETFs. |
