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

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

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