Computer glitch exacerbates Dow Jones plunge

You might classify this as a story about 1) the need to have a plan to smoothly bring backup computer systems online, or 2) a glimpse into what happens in an always-on world when connectivity fractures, even for a little while.

Dow Jones Inc., the company that computes and publishes the DJIA (and index of 30 blue chip stocks that is taken to be an important indicator of the stock market's overall performance) was having trouble keeping up with the volume of data coming from the New York Stock Exchange. The sell-off had started in the morning, and as the Associated Press explains, Dow Jones

discovered shortly before 2 p.m. that its computers weren't properly handling the day's huge volume in trades at the New York Stock Exchange.

It switched to a backup computer, and the result was a massive swoon in the index as the secondary system took over processing shortly before 3 p.m.

The Dow plunged about 200 points almost instantly, and was down as much as 546 points - its worst single-session decline in more than five years, and one that sent the blue chips into negative territory for the year.

"I've never seen a collapse like that, and I've only been doing this for 47 years," said Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc.

Apparently, part of the problem was that while the backup system was being brought online, the DJIA looked like it wasn't moving; when the system came online, it appeared to market-watchers as if the Dow had suddenly had a massive drop. In other words, what happened was two things: 1) the system had been delivering incorrect (or very slow, which in an environment in which you need real-time information is functionally the same thing) information, and the backup system brought the DJIA up to date, BUT 2) it produced the new information in a way that made it look to already-overburdened traders like a massive sell-off-- a precipitous drop in an already-bad day-- had just happened.

Here's what it looked like:

(via Microsoft Is Awesome)

The top line shows how the actual index and the reported index started to diverge a little after 1 p.m., and by about 2:20 the information the index was delivering was an hour old. The red line on the bottom shows the lag: you can see how it builds, then ends very suddenly.

A 200-point drop over the course of a day is a bad day, but a similar (apparent) drop in less than a minute is the financial equivalent of a fire in a nightclub: the first makes participants want a drink, the second makes them panic for the exits. One equities trader was quoted as saying, "It [the drop] was literally seconds. I had never seen anything like that before."

To me, this is interesting because stock markets are some of the most information-intensive spaces there are; they've long been pioneers in adopting technologies for creating, analyzing, and communicating real-time information. They're a place where the future is already here. This event suggests one danger we might all face a few decades from now, when we're living in environments in which we fly by wire, and always-on in the base condition. Having that information will be tremendously valuable; but having gaps in real-time connectivity will be increasingly problematic, or even dangerous or panic-inducing.

Technorati Tags: computer, visualization

Comments

[Anthony Townsend]

What's weirder though is that the moment right after the reconciliation of the actual and published indexes is when the market started to rally. It's as if the psychological impact of the 150+ point drop was the financial equivalent of the London Blitz - what didn't kill the investment community only made only made it stronger and more resolved.