Wall Street Nervous After 'Flash Crash' Thursday

Nasdaq CEO said many factors led to the plunge, Congress announces hearing.

ByABC News via GMA logo
May 6, 2010, 3:13 PM

May 7, 2010 — -- The Dow Jones Industrial Average opened lower Friday morning as investors reeled from Thursday's "flash crash" on Wall Street, which saw the biggest one-day plunge ever in the Dow.

Stocks took a sudden, breathtaking plunge in a massive sell-off, with the Dow falling nearly 1,000 points at one point in the afternoon -- before rebounding just as quickly. It closed down some 348 points, at 10,520.32.

Sources told ABC News that a trading error at Citigroup may have contributed to the abrupt drop, but the bank has denied it. Today, Nasdaq's chairman and chief executive officer Bob Greifeld said it was a combination of factors that spooked the market, including the situation in Greece and heightened activity in the U.S. futures market.

"It was not really a terminator situation," Greifeld told "Good Morning America's" George Stephanopoulos. "When you look at it, the people who were assigned the responsibility of providing the liquidity into the market, especially in times of stress, did not do that."

"It's as if you walked up to the teller and the teller shut the booth," he explained. "That certainly spooked the market and that contributed to the downfall."

Investors and traders weren't the only ones spooked.

On Thursday evening, the Securities and Exchange Commission and the Commodities Futures Trading Commission announced that they are reviewing the stock market's sudden plunge.The Treasury Department will be monitoring the progress of the inquiry.

This morning Congress also got in on the act when Rep. Paul Kanjorski, D-Pa., chair of the House Financial Services subcommittee on capital markets, announced a hearing next Tuesday to look into the drop.

In a letter to SEC boss Mary Schapiro, Kanjorski said, "We cannot allow a technological error to spook the markets and cause panic. This is unacceptable. In this day and age with the use of such complex technology, we should be able to make sure that our financial markets are effectively monitored and investors are protected."

The Wall Street Journal reported today that several of the so-called high frequency trading firms, which on most days account for a substantial percentage of the trading volume, simply stepped out of the market when the gyrations began. The result was multiple stocks losing 100 percent of their value.

Greifeld on Thursday cancelled many of Nasdaq's trades that fell or rose more than 60 percent, such as for consulting firm Accenture, the value of which temporarily plunged more than 99 percent, from $42.17 to a penny. Greifeld said there were no errors in Nasdaq's computer system, but added that the technology currently in place should be revisited and improved.

"We do have to step back and look at the circuit breakers we have in the marketplace today and see if they can be improved," he said on "GMA." "This was a different type of situation that I think the circuit breakers were meant to address."

The drop in the market was also fueled by the economic crisis in Greece, where the government has to make massive spending cuts to secure a $142 billion loan from the International Monetary Fund and the European Union. The bailout is crucial to prevent Greece from defaulting on its debt, which would trigger a massive economic crisis in Europe and worldwide, but the cuts are widely unpopular.

Greece's finance minister said Thursday that the aid package was the country's only hope of avoiding bankruptcy.

For now, the country has imposed austerity measures, such as cutting salaries and pensions and raising taxes to qualify for the package. The public reaction to the cuts, however, has been one of outrage and violence, with three people dying during riots in Athens on Wednesday.

President Obama on Thursday summoned Treasury Secretary Tim Geithner to brief him on the situation.

Geithner, who has a "Bloomberg box" on his Blackberry -- providing real-time stock information -- was surprised to see what was going on. While the Greek debt crisis is creating a "backdrop of fear," one senior administration official told ABC News, this was altogether something else.

Obama too was very concerned. Within minutes Geithner and Larry Summers, director of the president's National Economic Council, had been summoned to the Oval Office to brief the president. They continued to do so throughout the day.

The Obama administration has long been concerned about the Greek debt crisis, officials say, specifically that the European Union has not acted quickly or boldly enough.

"The crisis in itself is manageable," an official says. "But they've taken their time."

Geithner will talk to his counterparts in Europe later today when he holds a conference call with G-7 nations. President Obama may talk to some European leaders later today as well.