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Prosperity to Panic in 60 Seconds

Procter & Gamble is at the center of an investigation into yesterday’s market chaos, which caused all of our investments and 401(k)s to temporarily tank. It felt like the machines were taking over.

By LUKE SIMPSON, Associate Editor

Last week’s earnings reports for the big chemical companies were flush with big profits, signaling a turnaround for not only the industry, but the economy as a whole. Share prices shot up and things were looking rosy:

  • Dow Chemical’s first-quarter sales rose 48 percent.
  • DuPont announced first-quarter profits were up 15 percent, prompting the company to boost its 2010 earnings forecast.
  • Eastman Chemical’s earnings were 50 times higher than a year ago.

The next thing you know, the market goes into a freefall, dropping nearly 10 percent — the biggest point drop ever seen — before shooting back up about 7 percent.

I happened to be checking some of my shares when the you-know-what hit the fan. An indexed fund I bought into about a year ago was sitting pretty at about $52 a share until about 2:40 p.m. yesterday when it fell off a cliff to $0.13. Suffice it to say I was sweating.

Then just as quickly as it started, my fund was back up to $51. It’s hard to say exactly what happened, but it felt like the machines had taken over.

A lot of reports point to Procter & Gamble as a trigger for the collapse. The company’s well-liked shares have been steadily increasing above $60 for the last month, but suddenly dropped to $39.37.

Procter & Gamble’s management stated that it thinks the low share price was an error, leading to the question: Was it a computer glitch or the so-called “fat finger” — human error that resulted in a $16 billion sell order instead of the intended $16 million?

And how much of the subsequent drop-off was panic and how much resulted from the safety mechanisms built into trading programs, which are designed to sell a stock if it dips below a certain level?

The NASDAQ reported overnight that it will cancel trades that rose or fell more than 60 percent between 2:40 and 3 p.m., indicating that something less than legitimate was going on.

It wasn’t until I left work that the ridiculousness of the situation dawned on me. We now have a highly automated electronic trading system that can throw the entire market into chaos in 60 seconds flat.

I can handle the fact that the market and the “real economy” are often not in agreement, and I can even accept the fact that debt problems in a small pocket of Europe affect us the way they do, but I’ll never trust anything without a conscience, be it a computer or the greed-driven traders that program them.

Did you survive the crash of 2:45? Are we losing control of a system that is already too volatile? Send me an e-mail at [email protected].