Who caused sell-off? Space aliens or fat finger

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The final numbers of the day's trading is shown on a board on the  floor of the New York Stock Exchange, May 6, 2010. REUTERS/Lucas  Jackson

The final numbers of the day’s trading is shown on a board on the floor of the New York Stock Exchange, May 6, 2010.

Credit: Reuters/Lucas Jackson

NEW YORK (Reuters) – “Fat finger” has company.

Oddly Enough

The initial theory that an errant trader caused Thursday’s mysterious stock market plunge isn’t the only dubious hypothesis making the rounds.

Commentators and conspiracy theorists — whether just joking or trying to raise mischief — have cast the blame far beyond the investment community, even naming extraterrestrials and North Korea.

As long as the origin of the rapid, near-1,000-point drop in the Dow industrials remains unexplained, rumors and wild speculation will thrive.

A big U.S. exchange operator said on Tuesday there was no “smoking gun” to explain what happened, while regulators and exchanges solidified plans to adopt circuit breakers to prevent a reoccurrence.

At first the markets were quick to blame a “fat finger,” in which a trader was said to have sparked the rout by mistakenly inputting a massive sell order.

The theory, perhaps because of an obvious association with “fat cat” bankers, seemed to become an allegory for Wall Street Gone Wild. Fat finger was an easy target for people who saw their retirement funds shredded by the financial crisis and then bailed out bonus-collecting bankers with their tax money.

The only problem is that the theory has been largely discredited. Investigators are now looking for intentional trades that may have set off a selling frenzy by computerized, high-volume trading operations that account for at least half of stock market liquidity in the United States.

A congressman from Pennsylvania contributed to the parlor game with a quip on CNBC television.

“I don’t want to cause any panic or fright, but it could be anywhere from a cyber attack to an alien invasion to just stupid programing,” U.S. Rep. Paul Kanjorski said.

For true believers in the most irresponsible conspiracy theories, there’s always the North Koreans.

A blog item being replicated on the Internet postulates that the sell-off may have been prompted by reports that a North Korean strike force was responsible for the oil spill in the Gulf of Mexico.

Why stop at just one conspiracy theory? The blog also suggests the United States ordered a “complete media blackout” about the supposed strike.

On the more serious side, The Wall Street Journal on Tuesday examined a trade in the Chicago options markets.

But even that theory has its intrigue because it involves hedge fund Universa Investments LP, which is advised by Nassim Taleb, author of “The Black Swan: The Impact of the Highly Improbable,” a book that attempts to explain rare events.

Universa placed a $7.5 million trade for 50,000 options that may have briefly hurt stock prices, leading traders on other side of the transaction to place sell orders in order to offset some of the risk, the Journal said, citing unnamed traders in Chicago.

That could have led to even more hedging sales, triggering even more computer-generating trading. At that point high-speed trading firms pulled out of the market, creating a void of buy orders that allowed some securities to free fall.

Or maybe the space aliens were just shorting the market.

(Reporting by Daniel Trotta; Editing by Richard Chang)

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