The infamous "Flash Crash" of last Thursday where the Dow Jones Industrial Average lost as much as 998.50 points in a matter of minutes could have been much worse. The Dow actually fell 1,250 points if you calculate the average using the low prices for the day that traded away from the NYSE on other exchanges.
This is not using the trades that were busted because they were 60 percent off the market, according to Lon Juricic, who ran the shocking numbers for his informative research site StreetInsider.com. These are trades that stand for the stocks, but just didn’t go into the index calculation.
The low for Procter & Gamble during the quick collapse was $39.37, which occurred on another exchange and still stands to this day because it was within the parameters of legitimate trades as dictated by regulators and the exchanges. But the low price for P&G that went into the Dow calculation during the crash was $56.
“It could have made the situation during and after much worse had traders and investors seen ‘Down 1,250’ on the board,” said Juricic, whose firm provides market analysis and insider transactions data. “If people are using the Dow’s quoted low in their models, then it is wrong.”
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The NYSE put in so-called circuit breakers following the crash of October 1987 in an effort to pause trading and reduce volatility. Trading is halted if the Dow declines between the open and 2:30 p.m. by more than 1,050 points. However, this first halt wouldn’t have applied Thursday because the drop occurred after 2:30 p.m., when the threshold is increased to 2,150 points.
“With another 900 points to go for the circuit breaker, it would have been mass chaos down here,” said Steve Grasso, director of institutional sales for Stuart Frankel at the Big Board and a ‘Fast Money’ contributor. “It already was actually. I felt like I was sitting in the middle of a financial Fallujah.”
Juricic calculated his new Dow low of 9625.97 for that day just like the Dow Jones Indexes service does, but using these off-exchange lows. He added the 30 components up using the $15 low for General Electric , the $67.98 low for 3M and so on. Then he divided by the Dow divisor for Thursday. The divisor is an essential part of calculating index levels which accounts for stock splits in the member stocks through the years.
Accounting for this new Dow low could hurt confidence going forward in part because it would throw off levels used by technical analysts to predict future movements, according to traders. They look at intraday lows and highs on their charts to establish points of resistance and support. This would mean this much lower level would replace 9,870 as the low for that day and a point of key emotional support on future Dow losses.
“The technicians don’t care what caused it,” said Jon Najarian, co-founder of TradeMonster.com and a ‘Fast Money’ trader. “It traded there.”
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