Stock Market Crash? Or Trading Error?

(Stock market crash article updated with Friday morning news and additional analysis regarding the causes of the Thursday's stock market crash and rebound.)

NEW YORK ( TheStreet) -- The Dow Jones Industrial Average plunged on Thursday afternoon, as the week-long selloff in the markets took a turn for the worse and began the talk of a stock market crash.

The Dow, which was being celebrated just weeks ago as it made the return to the 11,000 level, was down between 500 points and 900 points in wild Thursday afternoon selling. All the major market indexes were bleeding, with percentage declines over 3% in both the Dow and Standard & Poor's 500 Index on Thursday.

On Friday morning, buoyed by a better than expected monthly nonfarm payroll report from the government, the markets opened positive, even though the Asian markets had fallen overnight -- with Japan offering emergency investment to its financial system for the first time since the Dubai crisis -- and European equities trading down again.

Was the fact that the Dow was down 900 points before it narrowed those losses on Thursday afternoon, ending down a more "modest" 348 points, just a sign that trading machines had run amok in the U.S.?

Stocks including 3M ( MMM), Procter & Gamble ( PG) and Accenture saw sudden share price free falls that suggest some kind of as-yet unexplained trading error in the markets.

By Late Thursday, the Securities and Exchange Commission was trying to figure out if there was any nefarious trading activity behind the huge Dow drop, while the big exchanges were passing around the blame buck. NYSE Euronext said it was electronic trading that cause the sudden market rout, while Nasdaq CEO Bob Greifield was on CNBC on Friday morning blaming the NYSE for walking away from its role of providing liquidity to the markets, a charge that the NYSE immediately countered.

Regardless, the Greek debt crisis, and the larger fear of a European debt contagion, have roiled the markets all week, so is a stock market crash next, even if the NYSE, or the electronic trading systems, or a shady trading scheme are to blame for the massive V-shaped action in the market's yesterday?

Was the Dow's drop of 348 points a sign that the worst is yet to come, even if trading errors prove to be the primary cause of Thursday's sudden crash?

The euro reached new annual lows every day this week. The MSCI World Index saw all of its 2010 returns wiped out. One day losses of more than $1 trillion in the equity markets have become the short-term norm for trading sessions.

While the Greek Parliament was approving austerity measures for the European Union bailout package on Thursday afternoon, protesters were still lined up outside the Greek Parliament. The three fatalities on Wednesday in the Greek protests put the ugliest face on the economic unrest in Europe becoming a much larger social issue.

Have investors simply lost faith in the European Central Bank to resolve the Greek debt situation before all of Europe is taken down by the debt albatross currently wrapped around its neck? The ECB president downplayed the ongoing risk to the euro on Thursday morning, and some market watchers were losing confidence in the European Central Bank's management skills.

The ECB did not follow through on a much-rumored plan to buy up bad European debt in a manner similar to the U.S. government's bailout of the U.S. credit markets, which some in the market believe could sure up much of the debt crisis in Europe. Germany's parliament, whose support is crucial for the passage of the Greek bailout package, was far from at a consensus vote to approve on Thursday afternoon.

Is it a failure of Europe to bring its debt crisis under control? Or is all the fear in the market triggered by the ongoing economic and social unrest in Europe just a convenient excuse for investors to book recent gains?

Some market strategists believe that the European debt contagion fears are overdone, and in the end, we are witnessing the short-term profit taking by investors. "Europe won't derail the global recovery," said Robert Pavlik, chief market strategist at Banyan Partners. "Europe will slow it down somewhat, but I don't think it has the power to derail the recovery."

Pavlik cited as an example that fact that investors are even freaking out about China. "The markets are treating China's growth as a negative. The market is looking for an excuse to sell, and its feeding that excuse," Pavlik said.

The Banyan Partners chief strategist said the latest rally began in the equity markets off February low points, and many investors were late to get into the game -- a fact he said is corroborated by trading volume data up until a few weeks ago. "The investors last into the rally don't have the profit protection that longer-term investors have, and so they sell more quickly," Pavlik argued.

Whatever the mysterious cause for the market crash, the late Thursday afternoon, it was the biggest three-day drop in a year for the equity markets. Greek, Italian and Spanish bond yields surged as confidence in Europe to rescue itself ebbed.

The MSCI World Index has taken its biggest hit in more than a year by the end of trading on Thursday. The MSCI Asia Pacific Index and the Stoxx 600 Index joined the MSCI World Index in erasing all of their 2010 gains on Thursday.

Greece's two-year note yield reached a record 16%.

Whatever the ultimate explanation for the wild swings in trading on Thursday, fear remains front and center in the markets stemming from the European debt crisis spreading farther and wider than previously anticipated.

The U.S. markets opened up on Friday, but within a half hour, were dragged back down into the red.

Indeed, the dip even deeper into fear by the markets late on Thursday begs the question: What is the cause of the latest wild turns in recent equity markets trading? Take our poll below to see what TheStreet thinks -- and don't forget to leave a comment on one of the most remarkable drops, and recoveries, in the history of the markets.

What is the cause of the latest wild turn in recent equity markets trading?

The wild trading is no more than short-term profit taking.
The speed-trading machines went bust, choking on their own algorithms.
It was human error; some trader just lost his job.
Lack of faith in the European Central Bank and European Union is the culprit.
It's panic-button time; this is the double dip in the Great Recession.

-- Reported by Eric Rosenbaum in New York.

RELATED STORIES:


Follow TheStreet.com on Twitter and become a fan on Facebook.

Copyright 2009 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

More from Emerging Markets

Wall Street Looks To Extends Gains After Goldman Earnings Beat, China Data

Wall Street Looks To Extends Gains After Goldman Earnings Beat, China Data

China's President Xi Jinping Tells Boao Forum He Supports Opening Markets

China's President Xi Jinping Tells Boao Forum He Supports Opening Markets

U.S. Stock Futures Steady; Asia Stocks Mostly Lower

U.S. Stock Futures Steady; Asia Stocks Mostly Lower

Jim Cramer: There Are Plenty of Shorts in Constellation Brands

Jim Cramer: There Are Plenty of Shorts in Constellation Brands

Renault Shares Hit 10-Year High on Nissan Merger Report

Renault Shares Hit 10-Year High on Nissan Merger Report