The May 6 Stock Crash Revisited
Procter & Gamble may have to put the second half of its name in bold in the future or maybe add an exclamation point. Cowboy capitalism threw a lasso around the staid 173 year old household products company on black Thursday, shaving some $62 billion off its market cap at the low point in trading.
Procter & Gamble started its day on May 6, 2010 talking about babies’ bottoms. It went downhill from there. Jodi Allen, Vice President for Procter & Gamble’s Pampers line of baby diapers issued a press release stating: "For a number of weeks, Pampers has been a subject of growing but completely false rumors fueled by social media that its new Dry Max diaper causes rashes and other skin irritations.”
It’s highly doubtful that this statement could have set off a precipitous plunge in its stock price. The company has been around since 1837. It owns some of the most well known brands in the world: Gillette, Ivory soap, Crest toothpaste, Camay, CoverGirl, Max Factor, Pantene, Oral-B, Scope, Pepto Bismol, Cascade, Vicks, Charmin and dozens of other top brands.
What Procter & Gamble is also, however, is one of the 30 stocks that make up the Dow Jones Industrial Average, the index most frequently quoted as a measure of the stock market. Someone wanting to knock out a strut holding up the stock market structure might see entering a large sell order on Procter & Gamble as one of a number of pivotal steps. Here’s why.
Procter & Gamble is in a lot of hands. Because of its historic strong performance and stability, it’s owned by a lot of conservative mutual funds. It would be beneficial to someone wanting to conduct a bear raid on the market on May 6 to knock out all those trailing stop loss orders on Procter & Gamble and pick up a tidy quick profit. (A stop loss order is when one wishes to place a limit on how far down one wants a stock price to go before it is automatically sold. That order stays in place for weeks or months or even years until the stock reaches that price and then is executed on the next tick. Unfortunately, on May 6, the next tick could have been many points below the last tick.) Stop loss orders also serve to slow down plunging stock prices because they cause trades to be printed at each of these various price levels, offering a chance for new buyers to come in at these prices. Once these are knocked off, there’s a big air pocket in a plunging market.
According to reports of time and sales, around 2:45 p.m. when the massive market disruption got underway, Procter & Gamble traded at $59.66. It had opened the day at $61.91. About a minute later, it was trading at $57.36, then $53.51, then it hit a liquidity air pocket and plunged to print a trade at $39.37. This created panic in the market. If one of the most conservative stocks can hit a 36 percent downdraft, some traders thought a major news event was happening outside. Liquidity hit a wall. In an eight minute span, the Dow lost $700 billion and saw a cumulative decline of 998.5 points or 9.2 percent before turning on a dime and moving in the opposite direction. It closed the day down 3.2 percent.
Aggravating the liquidity crunch on May 6 was the fact that the New York Stock Exchange, where Procter & Gamble is listed, paused trading momentarily to let humans on the floor of the exchange attempt to find buying support. That pause sent trades off to the world of electronic exchanges which now make up the bulk of all trading in the U.S. The New York Stock Exchange has only a 25 percent market share in its own listed stocks. The cowboys of capitalism command the rest.
To underscore how dramatic and unprecedented the trading in Procter & Gamble was on May 6, I reflected back to the day I sat behind a Wall Street terminal and watched the market lose 22.6 percent in one day. That day was October 19, 1987. That was more than twice the percentage drop at the worst market point on May 6. And yet, Procter & Gamble lost only 28 percent at its worst point in 1987 versus 36 percent on May 6 when the overall market was down less than 10 percent.
When a bear raid knocks out these stop loss speed bumps on Dow components like Procter & Gamble and 3M (it lost 21 percent at its worst point), the New York Stock Exchange pauses trading momentarily and trades are left to the feckless electronic exchanges, proprietary trading desks of the bailout boys (big Wall Street firms) and high frequency traders. This is like hitting an air pocket at 30,000 feet, then opening the cockpit door to find out no one is inside and the plane is on autopilot as the plane goes into a nose dive.
But sell orders in individual Dow component stocks were not the only problem on May 6. There was extensive selling in the Standard and Poor’s 500 futures contract known as the E-Mini. Futures can be purchased on much greater margin giving bear raiders a bigger bang for their buck. According to testimony from Gary Gensler, Chairman of the Commodity Futures Trading Commission before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises yesterday, one trader “entered the market at around 2:32 and finished trading by around 2:51. The trader had a short futures position that represented on average nine percent of the volume traded during that period. The trader sold on the way down and continued to do so even as the price level recovered. This trader and others have executed hedging strategies of similar size previously.” That last sentence may be ignoring the reality that this was no ordinary day: the gauge of fear in the market, the VIX, had spiked over the past two days; there was intense fear of Greece defaulting on its debt and stresses in the credit markets were being reflected in rising yields on junk bonds.
Cumulatively, mom and pop investors lost many millions of dollars on their stop loss orders from this free fall on May 6. Only those trades occurring between 2:40 and 3 pm that were 60 percent or more away from the market are being cancelled. That means the losses in Procter & Gamble and dozens of other stocks are real losses for those who got stopped out and real profits for those on the other side of the trade.
Over my 21 years on Wall Street, I never saw anything as remotely so suspicious as the trading activity on May 6 or as nonresponsive as the SEC’s investigation to date.
To be continued…
PAM MARTENS worked on Wall Street for 21 years; she has no security position, long or short, in any financial company. She and family members own less than 500 shares in Procter & Gamble. She writes on public interest issues from New Hampshire. She can be reached at firstname.lastname@example.org