The sickening lurch in the Dow caused scenes of chaos in US markets as computer-based programs kicked in and exchanges and currency markets struggled to handle an unprecedented surge in volumes.
The panic spilled over into other markets as investors fled for the safety of government bonds causing yields to drop and pushing the dollar sharply higher.
US regulators are undertaking a forensic investigation of the day's trading in an effort to pinpoint the cause of the collapse as exchanges move to cancel obviously erroneous trades.
Nasdaq issued a statement saying it would cancel all trades executed between 14:40:00 and 15:00:00 that showed a 60% swing in price during the peak trading period.
"There is no indication at this time that a Nasdaq market participant experienced a technological failure in connection with this event," the statement continued.
The Chicago Mercantile Exchange also felt moved to responded to rumors concerning irregular trades by Citigroup in stock index futures: "While our policy is not to comment on individual participation in our markets, in light of volatile market conditions, CME Group confirmed that activity by Citigroup Global Markets Inc. in CME Group stock index futures markets does not appear to be irregular or unusual in light of market activity today."
Whatever the cause, the freefall in the markets will stoke up regulatory concerns about the role played by high frequency traders and automated trading programs in the ensuing market meltdown.
Giles Nelson, chief technology strategist of Progress Software, gives the vendor perspective: "Unfiltered access to trading destinations can end up causing trading errors or even a 1,000 point crash on the Dow Jones Industrial Average. This is why pre-trade risk management tools are absolutely essential - to monitor position limits, trading limits and to catch fat fingered errors before they happen. Banks and regulators must act to stop this happening. It is completely avoidable."
