Market goes nuts - VTI down 33%, recovers 29% in a matter of a few minutes

Wild ride on the market today.  (Still ongoing.)  VTI (Vanguard Total Stock Market ETF) was down 33% at one point, and then in a matter of a few minutes recovered nearly 29%.  (Note that this was not how much the actual stocks in the ETF went down as ETFs are priced by the highest bidder; many ETFs suffered presumably from liquidity issues.  Hence, my title is a bit misleading.)  The Dow sunk nearly 1000 points, or 9.8%, and quickly shot back up 600 points.  Heck, VB (Vanguard Small Cap ETF) was down 96% at one point (to 0.1; the bid price that is, the ask was still somewhat normal so purchasing at that price wouldn't have gone through) and then quickly shot back up.   Some people made a whole lot of money today, while others lost a bundle.  

I can't even load the Yahoo! Finance webpage.  Apparently, several people are unable to access their brokerage accounts.

Get this: it appears that an order went through for 39,000 shares of VTI for around $39!  VTI is now at 57.6.  That computer made somebody a lot of money.
 
More to come....

Update 4:05 PM ET: CNBC is reporting that the crash was caused by a trading error at Citigroup.  Earlier reported simply to be a "major firm."

Update 7:30 PM ET: It appears that there was a technical glitch in a variety of stocks, including P&G.  Nasdaq and NYSE are canceling all trades that moved more than 60%.  So, any of those VB trades at ridiculously low prices are canceled; however, the VTI trade @ 39 will stand as it's within 60%.

Update 5/7/10:  It seems as if the "fat fingers" theory blamed on Citigroup was pre-mature, and there is no evidence to substantiate it.

Vanguard Joins the Price War! Free VG ETF Trades and Cheap Equity Commissions

Wow! That is all I can say about the latest development. Vanguard just announced that its brokerage clients can now trade their entire 46 low-cost ETFs commission free! On top of that, they majorly slashed their equity commissions, which used to not be competitive with the rest of the market. Most commissions will be $7 or $2.

Here are the details:

New commission rates for ETFs and stocks 

Assets invested in Vanguard funds and ETFs _________________	Commissions for Vanguard ETF transactions _________________	Commissions for equity transactions _______________
Less than $50,000 (standard rate)	Free	$7 for the first 25 (subsequent trades $20)
$50,000–$500,000 (Voyager®)	Free	$7
$500,000–$1 million (Voyager Select®)	Free	$2
$1 million or more (Flagship®)	Free	First 25 free (subsequent trades $2)

Taken from https://personal.vanguard.com/us/insights/article/commissions-05042010

Vanguard CEO Bill McNabb explained:

For 35 years, Vanguard has been committed to reducing the cost of investing in mutual funds for our clients. Now, Vanguard is expanding our low-cost commitment to ETFs. Importantly, Vanguard offers a greater choice of ETFs with expense ratios that are among the lowest in the industry.

This Money article has more information and quotes. Yet again I need to update my Vanguard, Schwab, and Fidelity comparison post. This action is clearly in response to Schwab's and Fidelity's prior unveilings and it's great to see Vanguard attempt to remain competitive in all facets. Great news all around!

Note that there a few fine print issues that are important to note. First of all, it appears that the $50 fee for ETF conversion has been eliminated. Also note that "if you buy and sell the same Vanguard ETF in a Vanguard Brokerage account more than 25 times in a 12-month period, you may be restricted from purchasing that Vanguard ETF through your Vanguard Brokerage account for 60 days." Lastly, it appears that there is still a 1% redemption fee of up to $250 for selling non-Vanguard No-Transaction Fee funds held less than 180 days.

Update: DIY Investor brought up a good point in the comments section that I thought I'd add to this post. The free commissions may lead certain investors to increase their trading frequency tremendously, which, according to various behavioral economics studies, has proven to be overwhelmingly unsuccessful. McNabb addresses this point, further emphasizing Vanguard's underlying Jack Bogle approach to investing for the long-term:

To be clear, our commission-free offer is not intended to encourage the active trading of ETFs, which we believe is counterproductive and rarely successful.

Of course, that warning certainly won't convince all individuals. At least, Vanguard does have in the fine print that they reserve the right to restrict ETF purchases for those actively trading them above a certain threshold. This leads us to the one major concern of this announcement for investors that are disciplined, dollar-cost average indexers - since these transactions certainly do cost money and Vanguard is an "at-cost" provider, are they going to have to increase the expense ratios of their funds to compensate for those that excessively trade? Well, one could argue that the increased assets that will be poured in as a result will help to reduce costs and the economies of scales of the ETFs will reduce spreads and increase liquidity, making Vanguard ETFs even better. Rick Ferri, CFA, as quoted in the above linked article, suggests that Vanguard's patented structure of mutual funds/ETFs will make this commission free trading advantageous to Vanguard mutual fund holders as well. In any event, there certainly are a couple reasons for caution that will be interesting to monitor, but, in the end, I still see this as a very positive development for Vanguard customers.