Wall Street Nervous After 'Flash Crash' Thursday

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.

Economic Turmoil in Greece Hurts Markets

Wall Street sources told ABC News Thursday 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.

The trade is believed to have sparked a massive sell-off in shares of Procter & Gamble, because P&G is one of the single largest components of the S&P 500 average. The sell-off was enough briefly to trigger an automatic halt to trading in Procter & Gamble stock.

Citigroup denied the charge, saying the speculation is "unfounded."

"As we have said, based on our review, rumors about a trading error by Citi are unfounded," the company said in a statement today. "It is troubling that inaccurate and unfounded rumors were spread as far as they were."

Late Thursday, regulators from the Securities and Exchange Commission and the Commodities Futures Trading Commission said they would try to figure out why the market gyrated so wildly.

"The SEC and CFTC are working closely with the other financial regulators, as well as the exchanges, to review the unusual trading activity that took place briefly this afternoon," they said in a statement. "We are also working with the exchanges to take appropriate steps to protect investors pursuant to market rules."

Wall Street traders called it one of the scariest days ever, as they market take a nosedive in a matter of minutes.

"That was probably the most disturbing trading activity anyone is ever going to see in our lifetime," said Art Hogan, managing director of securities firm Jefferies.

Some traders said it was as if machines had taken over the New York Stock Exchange.

"It was terrifying," Bernard McSherry of Cuttone & Co. said on "GMA."

Greifeld said the situation wasn't just about one person hitting the wrong button, but a "confluence of factors" that caused panic selling.

"You had the backdrop of the unrest in Europe, the fear in the market, then we saw some heightened activity in the futures market that spilled into the equity market and what happened with Proctor & Gamble, and stocks such as that -- Accenture -- is we saw the main listed market basically step away, not answer the electronic phone calls, that also spooked the market and that was the additional factor that helped drive us into that abyss," he said on "GMA."

McSherry said until the economic situation in Greece is stabilize and until European leaders step up and address the crisis, the markets are unlikely to end their volatility.

"Until European leaders can step to the floor and show that they've really got their arms around this problem, are willing to address this forcefully, we're going to see days like yesterday," he said. "We're not going to really see us calm until that happens."

For investors nervous about the markets, experts say they should look at their portfolio and gauge how much risk they can comfortably take.

"It all goes down to what the risk profile is of each individual investor. There's no one right answer that covers all investors," Liz Ann Sonders, chief investment strategist at Charles Schwab, said on "GMA."

If the situation is going to dampen one's emotional stability, then they probably have too much risk in their portfolio, but those who are taking more longer-term investments may be able to take more risk.

"It really depends on where that investor sits on that risk spectrum," she said.

The situation, and especially if it was caused by human error, is unlikely to help smaller investors who feel overshadowed by larger firms to begin with.

"Even prior to yesterday, I think if you were to ask a lot of individual investors, they did feel like the market had become rigged against them and that it was a bit of a game that they couldn't possibly play with increased volatility," Sonders said, and if it was human error, which hasn't been confirmed yet, it won't "help improve the psyche of the individual investor."

Around the world, markets followed the lead of the United States and dropped significantly.

Asian stock trading got off to a tough start, with major market average turning in big red arrows in early trading. Fears of global contagion from the European sovereign debt crisis reverberated across the globe. While the most significant of the U.S. market's plunge were dismissed as a result of some unattributed trading error, there was a belief that the better than three percent sell-off at the closing bell wasn't a fluke.

The American markets, however, are on target for a positive open, according to the futures markets. The latest data -- a good predictor of the momentum -- shows the Dow opening up about 10 points, the broader S&P 500 up 2 points.

ABC News' Zunaira Zaki, Matthew Jaffe, Rich Blake, Ned Potter, Bianna Golodryga and Simon McGregor-Wood contributed to this report.