SALON

Wednesday, Apr 24, 2013 11:16 PM UTC

How a Twitter hack sent the market plummeting

A phony tweet from the Associated Press caused investors to dump $134 billion worth of stock

By and

Topics: Associated Press, Twitter, Wall Street, White House, Barack Obama, Themis Trading, , ,

How a Twitter hack sent the market plummeting

NEW YORK (AP) — For a few surreal minutes, a mere 12 words on Twitter caused the world’s mightiest stock market to tremble.

No sooner did hackers send a false Associated Press tweet reporting explosions at the White House on Tuesday than investors started dumping stocks – eventually unloading $134 billion worth. Turns out, some investors are not only gullible, they’re impossibly fast stock traders.

Except most of the investors weren’t human. They were computers, selling on autopilot beyond the control of humans, like a scene from a sci-fi horror film.

“Before you could blink, it was over,” said Joe Saluzzi, co-founder of Themis Trading and an outspoken critic of high-speed computerized trading. “With people, you wouldn’t have this type of reaction.”

For decades, computers have been sorting through data and news to help investment funds decide whether to buy or sell. But that’s old school. Now “algorithmic” trading programs sift through data, news, even tweets, and execute trades by themselves in fractions of a second, without slowpoke humans getting in the way. More than half of stock trading every day is done this way.

Markets quickly recovered after Tuesday’s plunge. But the incident rattled traders and highlighted the danger of handing control to the machines. It also raised questions about whether regulators should be doing more to monitor the relationship between social media and the markets.

Irene Aldridge, a consultant to hedge funds on algorithmic programs, said many of the trading systems just count the number of positive and negative words, without any filter. She wants regulators to do more but believes that glitches and plunges may be inevitable.

“You can’t ban Twitter,” said Aldridge, author of “High-Frequency Trading,” a guide to algorithmic trading.

Just how exactly the trading unfolded Tuesday is still a bit of a mystery.

Some experts say the computers took their cue from humans, picking up on a pause in buying as traders read the phony tweet. In Wall Street’s insanely fast trading world, humans holding back for even a second could have signaled to computers that buyers were drying up and that prices could fall, and so the computers should sell fast.

Others, like Saluzzi, think computers may have sold on the tweet itself. That’s possible because computer trading programs are increasingly written to read, and react to, news from social media outlets like Twitter.

Experts say the fake tweet seemed designed to catch a computer’s attention.

Rich Brown, head of Elektron Analytics, a Thomson-Reuters unit that sells news feeds that computers can read, said that the words “explosions” or “Obama” alone wouldn’t have triggered selling. But add “White House,” and it’s a combination even the slowest computer couldn’t miss.

Brown said his service doesn’t include Twitter in its feeds because there’s too much useless “noise” in the deluge of tweets and, given the 140-character limit to tweets, often too little context.

Before the fake tweet appeared on Tuesday, it looked like any other good day on Wall Street. Unexpectedly strong earnings reports sent stocks in the Dow Jones industrial average up 1 percent to 14,697 with three hours to go in the trading day.

Then, at 1:08 p.m. EDT, a tweet appeared on the hacked AP Twitter account stating that two explosions at the White House had injured President Barack Obama. Stocks immediately started falling and tumbled for two minutes.

The Dow dropped from 14,697 to 14,554, losing 143 points, or 1 percent. In the frenzied selling, oil prices dropped, gold rose, the dollar rallied and the price of Treasury notes, seen by many investors as a hiding spot, shot higher, briefly knocking yields to their lowest level of the year.

The AP quickly announced that its account had been hijacked and the report was false. The Dow began to climb again, recovering all its losses by 1:18 p.m. That was 10 minutes after the fake tweet, according to FactSet, a financial data provider.

A group called the Syrian Electronic Army said it was responsible for the hack. But the claim has not been corroborated. The FBI and the Securities and Exchange Commission said they had opened investigations into the incident.

Some Wall Street pros were surprised that a single tweet could move markets so much.

Julian Brigden, managing partner of Macro Intelligence 2 Partners, an investment consultancy, said the drop suggested an “unstable” trading environment dominated by investors too quick to buy or sell without any thought.

“To me, it’s indicative of a very dangerous market,” he said.

Though stocks eventually recovered for the day, investors have been on edge recently.

“People are looking for a reason to sell, and (Tuesday) it was a fake tweet,” said Adam Sussman, head of research at Tabb Group, a research firm. “Of course, once they realized it was fake, they bought back in, or they stopped selling.”

But he thinks humans played only a minor role in the stock plunge. He said most professional investors are too savvy to sell on a tweet.

“They’d get a tweet from AP and then say, `Oh, was there a corroborating tweet from Bloomberg? A corroborating tweet from Thomson Reuters?’ and so forth,” he said. “So I don’t believe that anyone selling substantial money saw that tweet and just began selling off billions of dollars.”

Joe Fox, founder of online brokerage Ditto Trade, said the selling was too fast for humans to have pulled off, and computers were to blame.

“Whoever this jerk (who wrote the tweet) is probably cost some people millions of dollars in a matter of minutes,” he said.

Computer programs have come to dominate stock-market trading over the past 20 years. The goal is speed, and it’s led to an arms race as companies develop ever-faster programs. High-speed trading came under public scrutiny following the “flash crash” of May 6, 2010, when a glitch erased 600 points from the Dow in five minutes.

One of the latest weapons in the arms race is machine-readable news. The Thomson Reuters service, one of the more popular offerings, scans 50,000 news sources and 4 million social media sites for stories.

Brown says his programs take news articles and announcements and automatically flag answers to the essential questions – who, what, where, when and why. The answers are translated into a code that an investment firm’s trading program can understand and then sent to clients. All of that takes less than one-thousandth of a second.

It’s up to the investment fund to place a value on each word and rank established news outlets over other sources like blogs or social media websites, Brown said.

Tapping into the stream of comments on Twitter has become increasingly popular. Earlier this month, the SEC cleared companies to release key announcements on Twitter, Facebook and other social-media venues. Bloomberg also added Twitter to its terminals, a fixture on every big bank’s trading floor.

Regulators have been studying the problems posed by automatic computer trading for years. Last month, the SEC proposed tighter oversight of automatic trading. Stock exchanges would be required to test their trading systems routinely, and report to the SEC about problems that could damage trading, like hacking.

“The exchanges love speed,” said Bart Chilton, a member of the Commodity Futures Trading Commission, a regulator that has been reviewing high-speed programs. “I’m not so sure that fast is always better.”

More Bernard Condon.

Matthew Craft is a freelance writer in New York. More Matthew Craft.

Next Article

Related Stories

More Related Stories

Featured Slide Shows

The week in 10 pics

close X
  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11
  • This photo. President Barack Obama has a laugh during the unveiling of the George W. Bush Presidential Center in Dallas, Tx., Thursday. Former first lady Barbara Bush, who candidly admitted this week we've had enough Bushes in the White House, is unamused.
    Reuters/Jason Reed

  • Rescue workers converge Wednesday in Savar, Bangladesh, where the collapse of a garment building killed more than 300. Factory owners had ignored police orders to vacate the work site the day before.
    AP/A.M. Ahad

  • Police gather Wednesday at the Massachusetts Institute of Technology to honor campus officer Sean Collier, who was allegedly killed in a shootout with the Boston Marathon bombing suspects last week.
    AP/Elise Amendola

  • Police tape closes the site of a car bomb that targeted the French embassy in Libya Tuesday. The explosion wounded two French guards and caused extensive damage to Tripoli's upscale al-Andalus neighborhood.
    AP/Abdul Majeed Forjani

  • Protestors rage outside the residence of Indian Prime Minister Manmohan Singh Sunday following the rape of a 5-year-old girl in New Delhi. The girl was allegedly kidnapped and tortured before being abandoned in a locked room for two days.
    AP/Manish Swarup

  • Clarksville, Mo., residents sit in a life boat Monday after a Mississippi River flooding, the 13th worst on record.
    AP/Jeff Roberson

  • Workers pause Wednesday for a memorial service at the site of the West, Tx., fertilizer plant explosion, which killed 14 people and left a crater more than 90 feet wide.
    AP/The San Antonio Express-News, Tom Reel

  • Aerial footage of the devastation following a 7.0 magnitude earthquake in China's Sichuan province last Saturday. At least 180 people were killed and as many as 11,000 injured in the quake.
    AP/Liu Yinghua

  • On Wednesday, Hazmat-suited federal authorities search a martial arts studio in Tupelo, Miss., once operated by Everett Dutschke, the newest lead in the increasingly twisty ricin case. Last week, President Barack Obama, Sen. Roger Wicker, R.-Miss., and a Mississippi judge were each sent letters laced with the deadly poison.
    AP/Rogelio V. Solis

  • The lighting of Freedom Hall at the George W. Bush Presidential Center Thursday is celebrated with (what else but) red, white and blue fireworks.
    AP/David J. Phillip

  • Recent Slide Shows

  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11

Related Videos

Comments

 7 Comments

Comment Preview

Your name will appear as username

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>

follow salon

Most Read

Popular on Reddit

links from salon.com

vote
Would we give up burgers to stop climate change? New study suggests if we reduce our intake of animal products by 25%, we can halt climate change
532 points533 points | 196 comments
vote
Facebook has been used to find ex-lovers, childhood BFFs or the one who got away. He used it to find the guy who, without his consent, made him his drug mule.
228 points229 points | 21 comments
vote
“This could be a career ender for Michele Bachmann”
135 points136 points | 54 comments
vote
Poll: 3 in 10 voters say “armed revolution might be necessary” - 29% say they believe they'll have to act "in order to protect our liberties" in the next few years
42 points43 points | 16 comments
vote
Capitalism, not feminism, killed home cooking–and fixing our broken food system is gonna take a lot more than some privileged women embracing “new domesticity”
33 points34 points | 19 comments

From Around the Web

Presented by Scribol
listener_new_rect The Listener: "The Shelter Cycle": Raised in a cult

Recommendations