A local trader was checking CNN at 3am yesterday for news of a terrorist attack when he saw the Dow Jones Industrial Average shedding 100 points a minute for a short time in the final hours of trade.
"The last time I saw that kind of plunge was during the Sept 11 (2001) attacks," he recounted.
UOB Kay Hian head of research Andrew Chow believes that the sell-off on Wall Street was driven by high-frequency traders (HFTs) who use superfast computers to try to make money from tiny differences in share prices.
HFTs account for up to half of trading activity on any given day in a major market like New York, while institutional investors such as hedge funds and banks make up a further 40 per cent.
To hedge their bets, most fund managers will put in a sell order known as "stop loss" in order to limit their losses when there is a dramatic drop in stock prices.
But this only exacerbates the selling pressure, as the huge movements driven by HFTs bring share prices down to stop-loss levels, which fuel further high-volume sell-offs by hedge funds and banks. That, in turn, makes the market even more volatile.
"Because of this, market pullbacks can be very swift compared with previous cycles," Mr Chow said. "There was some indiscriminate selling (yesterday) morning in Singapore, but not wholesale panic."
The Straits Times Index plunged as much as 3.7 per cent yesterday, but recovered to close down 2.2 per cent on a rebound in Dow futures yesterday afternoon.
Maybank Kim Eng dealer Lee Yu Sheng believes that the correction is a healthy one after last year's 18 per cent gain in Singapore stocks.
"If seven out of 10 calls from investors were 'sell' calls, then that is panic selling. But today, only half of the calls I got were 'sell' calls. There are still investors out there looking to buy, but are holding off in case there is another sell-off on Wall Street," he said.
KGI Securities Singapore head of research Joel Ng noted that a number of local stocks, including blue chips, fell 3 per cent to 4 per cent yesterday.
"Some investors were initially afraid that the sell-off is the start to a bear market. But local corporate earnings are expected to be good, and the global economy is growing strongly, so this is a good opportunity to accumulate good-quality companies cheaply," he said.
Investors who have been sitting on large gains from last year's rally in local stocks may just be locking in profits now, Mr Chow said. "The worst thing you can do is to sell indiscriminately, and when share prices rebound, you would look like you over-reacted."