Fed's "Fat Finger" Fantasy Fallacious

The cause of the last week's sudden plunge in stock markets remains an obsession of the Administration and securities regulators. The rush to blame something, or someone, has led to theories of manipulation, terrorist action, and a "fat finger" error in which a trader coded in an error to sell "billions" of shares instead of "millions." So far, the frenzied searches have turned up nothing.

In my estimation, they will not find a cause, because the cause is far too simple for them to believe. If you look at a chart of market action from last week, there was a clear rapid decrease in prices for several hours prior to the "sharp plunge" that caught everyone by surprise. Could it simply be that market action, exacerbated by programmed trading, simply resulted in the vast majority of participants deciding all at one time that stocks should be sold before they almost certainly would be cheaper in the near future? If all traders suddenly agree, you would see exactly such dramatic price moves. There is no inconsistency.

It seems very foolish that the SEC and Administration would find it "unacceptable" that the stock markets behave in such a fashion. One gets the feeling that they are highly offended that the market would show such volatility, as though a "normal" market should always be kind and smooth. I have a bulletin for you: Efficient market theory says that markets behave randomly. And random behavior includes sudden drops, and rises. Even if you don't believe in the efficient market theory, it seems clear that when everyone suddenly agrees that a good is too cheap or too expensive that the price of that good is going to suddenly show a very discontinuous pricing.

Probabilities:
90% chance that nothing "unusual" caused the sudden drop.
35% chance that this conclusion is buried by the investigators for several weeks.
85% chance that the sudden drop was caused by market participants deciding that political events in Europe, Greece, and Washington D.C. would cause a future decrease in U.S. GDP growth.