Was world crash started by $7.5m bet in Chicago?

New analysis of the Dow's mysterious 1,000-point drop last Thursday suggests that a large trade by a hedge fund advised by Nassim Taleb (above), author of Black Swan: The Impact of the Highly Improbable, was itself behind this 'Black Swan' - the term for a rare, unforeseen event.

According to the Wall Street Journal, soon after 2.15pm Eastern time, the hedge fund Universa Investments LP placed a big bet in the Chicago options trading pits that stocks would continue their sharp declines.

On a day when the markets were less strained, a $7.5 million trade for 50,000 options would scarcely have been felt. But less than 20 minutes later indexes were tumbling.

As the market fell, those declines are likely to have forced even more "hedging" sales, creating increased pressure that fed into a market already coloured with fear. As the selling accelerated and spread, exchanges became clogged with volume.

Then superfast-trading hedge funds that now provide much of the liquidity for the stock market pulled to the sidelines. "We had reached a critical point in the market, and it was poised to collapse," said Mark Spitznagel, Universa's founder, who denies that his fund started the decline.

As more evidence emerges, it is becoming far less probable that a "fat-finger error" - like ordering 16 billion trades instead of 16 million - was the cause.

Instead, exchange investigators believe a rare confluence of events conspired to drive the market dramatically down. They say markets have grown faster (hedge funds running high-frequency trades now make up an estimated two-thirds of stock-market volume) and more diverse, making it more difficult to ensure order.

Santa Monica-based Universa is accustomed to purchasing options contacts that pay off if a market trends lower. Universa's bet forced the market down and in turn forced counter parties like Barclays Capital to sell to protect their own positions. As the turmoil grew, 300,000 pieces of stock information - stock price moves, trades - per second poured into Barclays, far higher than the customary peak of 60,000.

Nassim Taleb hasn't commented on the Universa trade though he has warned broadly that governments taking on more debt will not cure crises caused by debt.

"We're in a situation where we had a patient who we discovered had cancer a year and a half ago and all we’ve been giving the patient is painkillers," he said. "The tumor is getting worse because we are transforming private debt into public debt and public debt is not manageable." ·