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How One Tweet Almost Broke US Financial Markets


Business  (tags: americans, business, consumers, corporate, corruption, debt, dishonesty, economy, finance, lies, marketing, money, politics, society, technology )

Kit
- 442 days ago - motherjones.com
When a phony Associated Press tweet reported explosions in the White House, Wall Street's computers reacted as if it were real.



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Kit B. (277)
Friday April 26, 2013, 5:54 am
Photo Credit: Luis Louro/Shutterstock



How One Tweet Almost Broke US Financial Markets

When a phony Associated Press tweet reported explosions in the White House, Wall Street's computers reacted as if it were real.

In the January/February issue of Mother Jones, I wrote about Wall Street's embrace of high-speed computer programs that execute thousands of trades per second. These algorithms, some of which can teach themselves and operate almost entirely without human interference, present a new and challenging danger to the stability of global financial markets because they work in timeframes that people can't begin to perceive. By the time an actual person realizes something is wrong, it might already be too late to fix the problem. The concern isn't that one firm's high-speed trading program will make a mistake, but rather that a bunch of them will make the same mistake at once, launching a chain reaction that could undermine the financial system.

On Tuesday, the world saw exactly how fast these sorts of programs can respond to bad news. Many high-speed trading algorithms are designed to read headlines and trade based on that information before human traders can react. So when the Associated Press Twitter account tweeted at 1:07 p.m. Eastern time on Tuesday that two explosions were reported in the White House and President Barack Obama was injured, the market fell immediately. Here's an image of the tweet in question: (See VISIT SITE for screen shot of tweet)

The S&P 500 fell nearly 1 percent, wiping out more than $130 billion in shareholder value in minutes. As the market plunged, quotes—offers to buy or sell—surged. But the vast majority of those offers were withdrawn before anyone could trade on them. Liquidity—a term that refers to the ease with which traders can buy or sell a financial product—dried up, suggesting that today's highly liquid markets are in fact very fragile. Liquidity in the S&P 500 E-Mini, the most important stock futures contract, has "never dropped that quickly and that far that fast—ever," says Eric Hunsader, who runs NANEX, a firm that provides software and services to high-speed traders. "The faster that we let trading go, the faster liquidity will disappear," he adds. For ordinary traders, the sheer speed with which high-speed traders pulled out of the market in the wake of the phony AP tweet suggests that "the investor is a spectator not a participant." He continues, "There is no way [the average investor is] going to be able to get in and take advantage of something like this. The prices you see on CNBC might as well be a newspaper at the end of the day."

Dave Lauer, a critic of high-frequency trading who used to write trading software, says he's not sure it was a bad thing that the market fell so far so fast. "For all intents and purposes for a few minutes people thought a bomb went off at the White House," he says. "I [understand] the complaint that [high-speed trading] provides liquidity in good times and it's not there in times of stress, but I think this is kind of a red herring."

Within about five minutes—after it became clear that the AP tweet was fake, the Twitter account was suspended, AP journalists tweeted that the tweet was false, and a group of Syrian activists claimed responsibility—the market recovered its losses. But the incident suggests that someone with the ability to hack high-profile Twitter accounts could wreak havoc on US and world financial markets, and make a lot of money doing so. If you knew that a hacked tweet was about to panic the markets, you could short the market for that period of time, or buy low when stocks hit bottom, knowing they'd recover when the news proved to be false. In fact, the fake tweet made regulators suspicious that something like that might have happened: The Commodity Futures Trading Commission is investigating trading in 28 futures contracts during the tweet crash to make sure everything was above-board and no one had inside information. The Federal Bureau of Investigation and the Securities and Exchange Commission are also probing the incident.

Although Lauer doesn't think the tweet crash points to problems with the markets themselves, he does worry that the SEC doesn't have the tools necessary to quickly figure out what exactly happened. "This is something they should be on top of right away," he says. "I don't think they have that capacity right now." (More on that here and in the magazine piece.(SEE VISIT SITE)

If the AP tweet had been real, the markets may not have been able to handle the strain, Hunsader counters. "If that was a real news event, the market would have been off. It would have been flash crash two," he says, referring to the May 2010 crash that caused around $1 trillion in shareholder value to evaporate in minutes before the market recovered. "It would have been right down, straight down. We would have been in serious trouble system-wide." Minutes are like hours or even days in the world of high-speed trading, and in the five minutes of the tweet crash, NANEX's computers tracked trades that had been delayed by four minutes because of unexpected market activity. If the tweet crash had gone on much longer, stub quotes—placeholder orders at outrageously low or high prices that firms never expect to execute—would have started being processed, just as they were during the flash crash, Hunsader says.

"We need certain rules of the road for technology, and that's particularly true with the advent of social media," Bart Chilton, a CFTC commissioner, told CNBC Wednesday. Chilton, like many of the people quoted in my story, is concerned that high-speed trading firms aren't required to have a "kill switch" they can flip if a trading program goes rogue—and there's no such fail-safe at the market or regulatory level either. This sort of light-speed market crash has happened before. It will happen again. The only question is how bad the next one will be.
*****

By: Nick Baumann | News Editor | Mother Jones magazine |
 

Arielle S. (315)
Friday April 26, 2013, 8:03 am
One would think that we might have learned to check the facts before panicking - or calling people terrorists - or going to war over weapons of mass destruction that don't exist - or committing suicide because the Martians have landed! But it seems we have not learned much yet....
 

Patricia H. (468)
Friday April 26, 2013, 8:39 am
noted
 

Dot A. (130)
Friday April 26, 2013, 9:09 am
let us use this 'error' to be wiser in the future

technology has its weaknesses, failings, and imperfections, too!

and too many people place their confidence upon this 'new' digital reality
 

Shanti S. (0)
Friday April 26, 2013, 12:23 pm
Thank you.
 

Janet R. (34)
Friday April 26, 2013, 1:37 pm
This is why we need Social Security and pension plans; the stock market is too easy come, easy go, and too swayed by news. Thanks Kit, very interesting article.
 

Birgit W. (140)
Friday April 26, 2013, 2:26 pm
Noted
 

Angelika R. (146)
Friday April 26, 2013, 2:34 pm
I have only heard a short one-sentence report on that, yep, shit can happen. Recently I also heard a local report about these high speed trade operations and there were suggestions to ban them. Obviously not every stock exchange or traders are using that yet so there are clear disadvantages.
 

Yvonne White (231)
Friday April 26, 2013, 6:42 pm
It's an Easy Fix - already in place in the German Market in Frankfort. America seems to love to play with matchs - and have an easy excuse when billions go missing!
 

Helen Porter (41)
Friday April 26, 2013, 8:33 pm
What? You mean they were having practice sessions?
 

Kerrie G. (135)
Saturday April 27, 2013, 5:07 am
Noted, thanks.
 

Lois Jordan (55)
Saturday April 27, 2013, 1:32 pm
Since nothing much has changed since the 2010 "flash crash," we should all be concerned, as the author said, that it will happen again. The last one cost $1 Trillion...could that be considered small compared to the next one? Where is Congress on this?!
 

Bryna Pizzo (139)
Saturday April 27, 2013, 2:29 pm
Thank you for the frightening news.
 

Elizabeth M. (66)
Saturday April 27, 2013, 4:16 pm
Than You Kit for this article. Such is the technological age!!?? I think most of it stinks - but then I am a senior, and didn't mind some of our old ways - I will say more people had jobs then - and our country of Canada had manufacturing companies, and labels that read Made In Canada - and we knew the food we ate was not tampered with, the way it is today. One major thing we did wrong was to drive lead sleds - but many more people walked to and from work in those days. So much for progress!!!









 

Ruth R. (215)
Saturday April 27, 2013, 5:20 pm
Noted.
 

Anne P. (241)
Sunday April 28, 2013, 8:18 am
I find this very frightening:

" ... Wall Street's embrace of high-speed computer programs that execute thousands of trades per second. These algorithms, some of which can TEACH THEMSELVES and operate almost entirely without human interference, present a new and challenging danger to the stability of global financial markets because they work in timeframes that people can't begin to perceive. By the time an actual person realizes something is wrong, it might already be too late to fix the problem. The concern isn't that one firm's high-speed trading program will make a mistake, but rather that a bunch of them will make the same mistake at once, launching a chain reaction that could undermine the financial system."
 

Klaus Peters (9)
Monday May 6, 2013, 12:02 am
A system set up for the rich and greedy, I am totally out of shares, also in my superannuation. The stock market cannot be trusted.
 
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