U.S. Stocks Tumble on Concern Over Europe, Trading Systems

Nasdaq Marketsite in New York
A pedestrian walks outside the studio at the Nasdaq Marketsite in New York. Photographer: Daniel Acker/Bloomberg

U.S. stocks slid, completing the biggest weekly decline in more than a year, after concern that Europe’s debt crisis is worsening triggered a plunge yesterday which undermined confidence in financial trading mechanisms.

American Express Co., Hewlett-Packard Co. and Cisco Systems Inc. lost more than 3 percent to lead declines in the Dow Jones Industrial Average. Apple Inc. lost 4.2 percent as Nokia Oyj said it sued the maker of iPhone and iPad patent infringement. All 10 industry groups in the Standard & Poor’s 500 Index fell today and benchmark gauges of U.S. equities erased their gains for 2010.

“It’s a confidence crisis,” said Quincy Krosby, chief market strategist for Newark, New Jersey-based Prudential Financial Inc., which oversees about $667 billion. “You’ve got yourself in a vortex of negativity in Europe. In the U.S., the investigation of yesterday’s trading is definitely an overhang. It’s a very precarious scenario. The market is waiting for a viable solution.”

The Standard & Poor’s 500 Index, which sank 3.2 percent yesterday for its biggest loss in a year, tumbled another 1.5 percent to 1,110.88 at the 4 p.m. close today in New York. The Dow fell 139.89 points, or 1.3 percent, to 10,380.43 after tumbling as much as 279 points. The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 25 percent to 40.95, the highest level in a year. The VIX surged 86 percent this week, the most in its 20-year history.

$1 Trillion Dip

Yesterday’s selloff briefly erased more than $1 trillion in market value from U.S. stocks and sent the Dow down almost 1,000 points before equities pared declines. Regulators plan to examine whether securities professionals triggered yesterday’s stock-market plunge or exploited the turmoil to profit illegally, two people with direct knowledge of the matter said.

One Securities and Exchange Commission memo, according to people who saw it, discusses a theory raised yesterday by NYSE Euronext spokesman Ray Pellecchia, who said sudden price moves in multiple stocks reached so-called liquidity replenishment points. That prompted the exchange to slow trading in those shares as it tried to ensure an orderly market. Such incidences allow other exchanges to ignore NYSE price quotes.

Trades sent to electronic networks then fueled the drop, Larry Leibowitz, chief operating officer of NYSE Euronext, said. While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the decline snowballed as orders went to venues lacking liquidity to match them, he said in an interview yesterday.

Canceled Trades

Nasdaq OMX Group Inc. said it will cancel trades of 296 securities that fell or rose more than 60 percent from their prices at 2:40 p.m. New York time yesterday, just before U.S. equities plummeted.

The S&P 500 lost 6.4 percent this week and the Dow tumbled 5.7 percent, the biggest declines for both since early March 2009. The S&P 500 is still up 64 percent from its 12-year low that month.

The biggest U.S. fund managers say the bull market in stocks should weather Europe’s widening sovereign debt crisis even as it spurs the largest surge in volatility since the collapse of Lehman Brothers Holdings Inc.

Employment in the U.S. increased in April by the most in four years and the unemployment rate unexpectedly rose as thousands of people entered the labor force, indicating the recovery is becoming self-sustaining. Payrolls jumped 290,000 last month, more than the median estimate of economists surveyed by Bloomberg News, after a revised 230,000 increase in March, the Labor Department said. The jobless rate rose to 9.9 percent last month from 9.7 percent.

‘Bull Market Is Intact’

“The bull market is intact,” said James Paulsen, who helps oversee about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “There’s economic momentum now. Volatility is going to stay elevated for a while, but there’s a chance we see new highs for stocks before the year is out.”

While equities may post more losses as countries from Greece to Spain struggle to cut deficits, managers at Birinyi Associates Inc. and First Citizens BancShares Inc. say declines are a buying opportunity. The retreat has made American stocks more attractive by reducing valuations as the economy and corporate profits recover, said Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co.

Technology shares had the biggest decline in the S&P 500 among 10 industries, dropping 2.3 percent.

Apple fell 4.2 percent to $235.86. Nokia said it sued the company in Wisconsin for infringement of Nokia patents processed and transmitted by Hugin AS.

Leap Wireless

Leap Wireless International Inc. slumped 15 percent to $14.26. Citigroup Inc. cut its rating on the pay-as-you-go mobile-phone carrier to “hold” from “buy” and Credit Suisse Group AG advised investors to bet against the stock.

Bigger rival MetroPCS Communications Inc. dropped 11 percent to $7.15.

AES Corp. plunged 7.7 percent to $9.89. The U.S. power producer with operations in more than two dozen countries lowered its 2010 forecast, projecting earnings excluding some items of 95 cents a share at most. That trailed the average analyst estimate of $1.02.

“Volatility is going to be with us,” said Art Hogan, chief market analyst at New York-based Jefferies & Co. “We might catch a bit of a rally because stocks are attractively valued and the domestic economy is better than we thought. But a lot of what caused the selloff is still there. People will be nervous.”