This week’s massive stockmarket plunge was almost certainly triggered by computers programmed to sell stock when certain signals were picked up, say analysts.
Despite positive economic indicators both in the US and across the globe, the key US Dow Jones index fell off a cliff on Monday, ending the day down 1,175 points.
But it was the speed of the fall that sent shockwaves round the world – at one point the Dow plummeted 700 points in just 20 minutes, and fell nearly 1,600 points before recovering slightly.
Automated trading using computer algorithms and pre-programmed sell orders kicked in creating a climate of fear that led to a massive downward spiral.
High-frequency trading allows computers to trade stocks in milliseconds, creating huge movements that would never occur at such speed were traders making the decisions.
The market is always “just one step away from massive volatility because of programmed trading,” Michael Yoshikami, chief executive of Destination Wealth Management, an investment-management firm in Walnut Creek, California, told the Washington Post.
“There’s no way that investors can compete with a computer making 1,000 trades a second. What it does is it ramps up the psychology of fear and greed for individual investors.”
David Weild, former vice-chairman of Nasdaq, told CNN: “We've created a stockmarket that moves too darn fast for human beings.”
As a result, he said, “We see shocking results”.
Miles Eakers, chief market analyst at London’s Centtrip, said he expected stockmarkets to start recovering soon.
“Fundamentals remain strong and any tightening would be in response to healthy macro-economic conditions, which suggests global stock markets will start to shift upwards again,” he said.
The FTSE 100 index of leading UK shares has been stable in morning trading today, hovering around the 7,125 mark, having recovered from a low of 6,927 on Tuesday.