A bad day in the life of a fragile market

Stocks slumped at the open of trading in New York on Wednesday in response to further indications that Greek debt negotiations are ill fated. European officials were talking up emergency humanitarian plans for Greece should a euro exit happen. Adding further volatility were deeper declines on the Chinese stock exchanges in the overnight session that pushed the Shanghai Composite down 32 percent from its June high and led to trading halts of nearly half of Shanghai's listed shares.

Then, market fragility hit home as the New York Stock Exchange stopped all trading due to "connectivity issues" that are still being investigated.

Wall Street's losses accelerated in afternoon trading after the release of the latest meeting minutes from the Federal Reserve -- indicating that a rate hike is due before year-end -- and ahead of the second-quarter earnings season kickoff, with Alcoa (AA) scheduled to report after the close.

After months of apparent tranquility, American investors are becoming aware of just how fragile U.S. financial markets have become.

As of 3:30 p.m. ET, the NYSE has not identified the source of the glitch but has restored trading activity. This comes in the context of a grounding of flights at United Airlines (UAL) this morning due to a computer problem and The Wall Street Journal's website going down. According to officials from the Department of Homeland Security and the FBI, the problems don't appear connected nor do they appear to be caused by a cyberattack.

It's worth noting, however, an abundance of cyberattack activity emanating from China today as tracked by online security firm Norse. A request for comment from Norse officials on the day's activity wasn't immediately returned.

indu07081502.png

On a technical basis, the day's decline is meaningful because it threatens to push the Dow Jones industrials below the 200-day moving average that has sustained the post-2012 uptrend, as shown in the chart above. The exception was the short-lived breach in October associated with the market's Ebola fears sell-off.

Continued losses here would call into question the longevity of the market's run without suffering a 10 percent correction -- which stands at the third-longest in recent market history, behind the runs seen during the last two bull markets.

The day's trading halt is just the latest in a long line of abnormal behavior in global markets as central bank intervention and the rise of computer trading algorithms actively manipulate price discovery. The Swiss National Bank has been active in the currency markets in the wake of the over-the-weekend Greek referendum. The Financial Times is keeping a running blog post of these oddities. Market research firm Nanex also maintains a list of market structure events.

Indeed, Federal Reserve Governor Lael Brainard recently revealed the central bank is studying the Oct. 15 "flash crash" event in U.S. Treasury yields, among other price dislocations, in regard to fears that the rise of high-frequency trading is having an adverse impact on market liquidity. This could potentially amplify sell-offs and leave the market "less able to absorb large shocks."

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.