Much will be written and TV commentators will talk endlessly about today's dramatic market plunge, so what can I possibly add to the conversation?   Well, by now the facts are well known, so how a brief recap followed by some observations.  First the recap: right in the middle of an orderly fear-driven selloff in the sever but not unprecedented range of 3%, some some trading anomaly drove the Dow down 1000 points, or about 10%, and then snapped back within minutes.  It is remarkable that even after the SEC, CFTC,  and the major exchanges studied the trades into the evening, they still don't know exactly what happened.  This is clear from the arbitrary remedy of cancelling all trades with a more than 60% price drop, rather than identifying specific trades to break.  You can also tell from the fact pattern that it wasn't triggered by a single mistake, like a scaled up trade order for a single stocks (think billion instead of million), as had originally been reported.  There were too many individual stocks involved.  If only it were that simple.

In spite of ragin' contagion and related fears of a credit market freeze, stocks shouldn't have fallen so far so fast, and if they did, they shouldn't have come back so fast.  It seems pretty clear from the steep V price pattern  that some form of algorithmic trading drove stocks into brief air pockets of no buyers.   However, the authorities and the exchanges can't explain exactly what happened.  The role of equity futures and cash futures program trading is also unknown at this time.  Either many algo traders were targeting the same stocks at the same time, driving sell orders into a illiquid environment, or momentum driven trading strategies went into overdrive as downward price momentum accelerated, or a combination of both.

Now the observation: Regardless of the exact cause, what we are seeing is an example of complex system interacting in unpredictable ways.  The system consists of traders and computers, trying to digest an impossibly complex set of macro and micro conditions.  Even though the system isn't new, today it behaved in a new way and produced a previously unobserved result.   Hopefully, we'll learn alot about the system, the interactions, and the result in the next few days, and that knowledge will make the system safer.  And two more observations: 1) while it appears to be an anomaly, it just be the first occurrence of a systematic result; and 2) while the regulatory authorities and the exchanges don't know exactly what happened, you can be sure some hedge funds and traders were also working late, and some of them may know exactly how it occurred.  In fact they may be positioning themselves to make profits if it happens again.

One thing is for sure: until we understand what happened, investor confidence will be further eroded creating yet another feedback loop in the system