Why the Dow crashed 1,000 points in 4 minutes this morning

As I entered a 10 o'clock meeting this morning, every metrics dashboard available suggested huge levels of reader engagement with headlines about the Dow's eye-popping thousand-point drop that took place within minutes of the opening bell. The headlines were so juicy and so clicky that even the New York Times felt the need to still be using one at 10:27 am, by which time it was no longer even remotely true that the Dow was down 1,000 points (the market had regained 700 points at that point).

The extreme yo-yo of the index was striking (thrilling, even, to a certain frame of mind) but also easily explicable by technical factors that should have cautioned everyone against alarm.

The key fact about trading early in the morning on any given Monday is that the stock market has been closed since Friday afternoon.

But that doesn't mean nobody has formed opinions about investment strategy in the interim. Money managers, hedge funds, and run-of-the-mill shareholders don't stop thinking about their money just because it's a Sunday. With no trading happening on the market, people trade "futures" instead. When the market opens, all those futures orders need to be filled. Normally nothing especially dramatic happens in the futures market, but that wasn't the case this weekend.

Dow and S&P 500 futures both hit daily limit-down http://t.co/skNkUh3mYL pic.twitter.com/er4FSJpTQU

— Bloomberg Markets (@markets) August 24, 2015

Starting at about 9 pm Eastern time on Sunday, futures contracts for American shares traded steadily lower. Eventually they reached the limit for how low they are allowed to go before trading is halted. That froze market sentiment in time until the opening bell rang, and all those pessimistic moves made overnight had be fulfilled very rapidly. Hence the 1,000-point plunge in minutes. It's not that anything in particular happened during those four minutes, it's just that changes in sentiment that had played out over hours got officially recorded very suddenly.

Since futures trading had been frozen at a very pessimistic moment, there was no way for more measured takes to be priced in until the formal opening. That's why the decline quickly moderated once things were up and running. Bottom line: The decline in stock prices this August has been large, but we're far from any eye-popping, record-setting moments.

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