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Did You Hear It? That Was the Sound of a Silicon Valley Wake-up Call

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If you were watching Twitter or the television yesterday afternoon — and even if you weren’t — you probably know all about the stomach-wrenching plunge that the major U.S. stock market indexes took. The Dow Jones Industrial Average alone fell more than 1,000 points, or over 10 percent, in a matter of minutes. A rebound quickly followed, and everything from program trading to a “fat-fingered” trader who typed “billion” instead of “million” was subsequently blamed for the fall. But while it’s tempting to dismiss the plunge as an aberration, the bulls — of which there seem to be many in Silicon Valley — would be wise to avoid that temptation, and yes, maybe even get a little worried.

Market authorities at the New York Exchange and the Nasdaq said that “erroneous trades” may have played a role in the selloff, which was then apparently exacerbated by program trades done at high speed by automated trading systems. But other market analysts say the program trading and the fat-fingered trader (or traders) are not the real problem. The biggest problem, they said, was that when those programmed sell orders came through, most of them found no buyers. Even when most people are selling, there are usually bargain-hunters willing to pick up the slack — but on Thursday there was a vacuum, and as a result, almost a trillion dollars in market value was erased (at least momentarily) in what some analysts called a “rush for the exits.”

Some of this rush was likely due to mounting concerns that the financial turmoil in Greece, which has been forced to refinance its massive debt, could spill over and topple other European economies, such as Spain and Portugal. That in turn could weaken the European Union as a whole — and thereby the euro — as other members are forced to prop up weaker economies in the union. And if there’s one thing that the financial meltdowns of both 2008 and 1998 have proven, it’s that both the stock markets and financial markets are truly a global web, and what affects one strand affects the entire structure. And yes, that includes the tech sector.

So what is Silicon Valley doing? Still drooling over startups such as Foursquare — which may or may not be getting takeover offers of $100 million, despite a distinct lack of revenue — and watching as Groupon is valued at over $1 billion and Facebook is valued at more than $20 billion, with many itching for an IPO for some or all of the above. All one hears is talk of how well things are doing in the tech sector, from bullish reports by leaders like Intel to forecasts of “soaring growth” in semiconductors and analysts jacking up their estimates. All this despite the fact that the plunge on Thursday — even after rebounding by more than 50 percent — wiped out the Nasdaq’s gains for the entire year.

About the only one who seems to have taken much notice of the plunge and its ramifications is Fred Wilson of Union Square Ventures, who said that even if the bloodbath was caused primarily by machine-driven trading, it should still make VCs and startups pause to reconsider their hopes for a quick IPO exit. He ‘s right. In fact, here’s hoping there were no trading irregularities or fat-fingered traders. Then at least it would be harder to dismiss the plunge as an anomaly, and the eternal optimists in Silicon Valley might be forced to consider the harsh global economic reality.

Post and thumbnail photos courtesy of Flickr user azrainman

12 Responses to “Did You Hear It? That Was the Sound of a Silicon Valley Wake-up Call”

  1. whoop dedo

    silicon valley is incresingly home to stupid lite-bulls

    if this sell-off was a “mistake” or a “glitch” in an otherwise healthy market, friday’s trade would have been 800 points to the upside for the dow

    yet friday saw the selloff continue

    was that a glitch too?

  2. You’re clearly trying to make the facts fit so you can make your point, and torturing the facts in the process. For example, “All this despite the fact that the plunge on Thursday — even after rebounding by more than 50 percent — wiped out the Nasdaq’s gains for the entire year.” Looking at the ICIX Nasdaq composite, it is clear that the events of May 6th only brought it back to where it was at the beginning of March, so even though it may be technically accurate to say “for the entire year” it would be more accurate to say “for the last two months”.

  3. This wasn’t a case of “no buyers”. This was a case of “no market makers” answering the offer to sell. A market makers role is to preserve stability (and liquidity) in an issue by always being able to take the other side of a trade. In yesterday’s free fall, its reported that market makers just didn’t answer the phone.

  4. The Greece situation has clouded the good to excellent news coming out from companies who are reporting stellar earnings which not only beat the street estimates but the guidance as well.
    Off course things are going well in the tech sector, look at Intels and Microsoft latest earnings and Apple which blew their estimates and have outsold the ipad based on their own projections and they have not even sold the ipad market in Europe.
    Why is Silicone Vally drooling over likes of Foursquare and Groupon is because these startup do have a business and future revenue model and in fact is a real business on the go unlike what we saw in the late 90’s when dot come start ups were in name only but lacked the depth of a solid business and revenue model. It’s easy to slam startups such as Foursquare and Groupon when markets nose dive but it takes pure guts to start something new and stay on course to deliver what you really believe in despite what the market is doing.

  5. But Mathew, it makes no sense that there were no buyers all the way down to zero for some stocks. It is certainly possible that the markets are soft. It is impossible that they were that soft. Proctor & Gamble didnt get down to a value of ZERO without their being a serious software problem. And from what I have been reading there were tons of people trying to buy into the downturn, but they couldn’t get their trades through. And that fits the fact pattern and common sense. It makes no sense that there were no buyers of these companies at 50% or 75% of current market price, which is what you are suggesting here.

    • I’m not suggesting there were no buyers all the way down to zero, or close to it, especially for stocks like Procter & Gamble. But that’s what a lot of traders were saying — that there were no buyers, or at least not enough to soak up all the selling. Whether they couldn’t get in because the systems were overloaded, I don’t know. I assume that’s one of the things regulators are looking at. But regardless, there was a distinct lack of buying, and that has to be a concern, even if it was exaggerated by system glitches.