A big jump in stocks in the last half hour of trading late on Wednesday sparked speculation that a bad trade in the futures market was behind the unexpected rally, but CME Group, the world's largest futures exchange, said trading was normal.
The rally led to market talk that a mistake had been made on a trade, resulting in a 180 point jump in the Dow Jones Industrial Average and a sharp rise in the benchmark Standard &Poor's 500 Index in the last 20 minutes of trade on Wednesday.
Traders in London overnight cited talk that someone made an error entering a purchase order for a futures contract, placing a far larger order than intended.
But CME spokeswoman Mary Haffenberg said the exchange encountered no problems with its S&P 500 futures contracts, whether on its Globex electronic platform or from the trading floor.
"We had no price corrections and no trade busts," she said.
A trade bust is when a trade is canceled after the order is erroneously executed.
There was also talk that the late Wednesday rally could have been related to an error in trading options on the S&P 500. A spokeswoman for the Chicago Board Options Exchange said there were no problems in the SPX options pit on Wednesday.
Merrill Lynch analyst Jon Davi said in a note to investors that one factor for the move up could be due to an error in the SPX option pit. It was the beginning of the month which can see large asset allocation orders and dealers adjusting their hedges at the end of the day in a high volatility environment, he said.
The late rally was most likely due to traders covering positions that bet the market would go lower, he added.
"We believe most dealers are short options and have to buy more futures as the futures move up or sell more as we move down," Davi said.
Jack Bouroudjian, a principal with Brewer Investment Group, doubted a trading error was behind the rally.
"That rally was not an aberration. That was a power short-covering, end-of-the-day, first-of-the-month rally," he said.