It doesn’t take much to scare investors when they are sitting on profits they don’t want to lose. We have had a significant run up in stock prices since the lows in March 2009 and given any opportunity, traders will cash in. This is normal behavior and when enough traders get jittery, the market has a correction. Of course after it falls a certain amount, they buy a lot of the stocks back and get to pocket the difference.
We saw a significant event yesterday when it seems like a trading mistake drove the market down nearly 700 points before it was corrected. Think about the fact that a single trader at a large institution could accidentally do this, if that is what happened. When you see the results, it makes you wonder if maybe someone will decide to do it on purpose. After all, the trade caused a tremendous short time drop followed by a rapid rebound. One could make a lot of money if you knew it was going to happen.
Of course we like to think that the “watchdogs” would catch such a thing. I’m not sure they have a lot of teeth left. What might be the scariest thing about the event is how it triggered other programs to take actions designed to protect portfolios. So, if you initiate enough of a market movement to get the other programs to kick in, you can watch the whole thing on autopilot.
I can think of lots of ways such an action could make money. You could be short to start and go long near the bottom. The buy programs can be manipulated too.
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