Market movements after AP hack show influence of social media on stock traders
The evolution of market news – from messages on homing pigeons to newspaper articles to round-the-clock wire reports – has taken yet another disruptive step with the arrival of Twitter on trading desks throughout the world.
While more speed means more profit to some, the downside of nearly instantaneous information was highlighted by this week’s dramatic drop in stock prices on the strength of a single, erroneous tweet appearing to emanate from the Associated Press.
The tweet’s report of explosions Tuesday afternoon at the White House was quickly corrected, but only after the Dow Jones industrial average dropped about 1 percent. Hackers calling themselves the Syrian Electronic Army claimed responsibility.
The episode, while lasting only several minutes, has drawn scrutiny from the FBI and a slate of regulators while also highlighting the hair-trigger nature of today’s markets, where the demand for greater speed clashes with the occasional reality of misinformation.
A new generation of analytical software sifts through hundreds of millions of tweets and other forms of social media for early warnings about news that may move markets, and, in some cases, the programs order trades automatically, without human involvement. In a world where an edge of milliseconds can mean the difference between profit or loss, this software has quietly begun shaping decisions that affect billions of dollars in assets, say traders and Wall Street analysts.
The market snapped back Tuesday just as quickly as it had fallen. Yet experts say the incident may be an early indicator of the increasing dependency of traders on social media platforms perhaps better known for their diet of celebrity musings, silly pictures and short-form social commentary.
“There are firms set up solely for the purpose of investing based on social media,” said Gary King, a Harvard University social scientist who has developed a program to analyze tweets that is drawing interest from Wall Street. “I don’t know that they’re making any money, but they’re out there.”
Automated high-speed trading now accounts for about half of daily stock market volume, and while few traders admit to having their algorithms make decisions based on a single tweet, several said the use of social media is growing. This kind of computerized trading tends to exacerbate market fluctuation, especially during sudden drops in prices, critics say.
High-profile Twitter accounts have been the subject of embarrassing hacks in recent months, including in February when hackers took control of the Burger King account, replacing its logo with the golden arches of rival McDonald’s.
Officials at Twitter did not respond to queries by the Washington Post yesterday, but Wired magazine’s website reported that the social media site is preparing to roll out a security measure called “two-step authentication.” The move would mark a response to concerns that Twitter accounts are too easy for hackers to access and send fake tweets.
It’s not clear whether Tuesday’s market drop was caused by fast-fingered humans or computers seeing the words “explosions” and “White House” in a tweet from a trusted source and ordering sales of stocks.
Traders and industry observers said human actions may have been as important as those by computers. “If it was just human beings reacting to this, you might have had the same movements, but maybe it would have happened much slower,” said Justin Schack, managing director at Rosenblatt Securities.
The Securities and Exchange Commission’s preliminary analysis suggests that traders on Tuesday did not withdraw from the market in massive numbers, as they did during the May 6, 2010, “flash crash,” when the market plunged 1,000 points in minutes before recovering, said John Nester, an agency spokesman.
“We have standard operating procedures whenever there are market developments, and this is no exception,” Nester said. “These procedures start with getting the facts about what occurred. We do not limit ourselves to looking at the catalyst for an event but also its repercussions, to determine whether any further inquiries or actions are warranted.”
Manoj Narang, chief executive of Tradeworx, which specializes in fast, high-volume trading, said the facts suggest that the blink-of-an-eye computerized trading that dominates Wall Street was not behind the market chaos Tuesday.
The market did not start to move until 23 seconds after the fake AP tweet was posted, at 1:08 p.m., said Narang, whose firm tracks every trade in real time, a technology it sold to the SEC last year.
“That’s not compatible with computer trading,” Narang said. “If it was computer algorithms that were trading, the market would have moved in a fraction of a second.”
He added, “The fact that it was 23 seconds suggests that humans were seeing the (tweet), thinking about it a few seconds and logging onto their computer to do a trade.”
Boston-based Crimson Hexagon, whose software was created by King, the Harvard social scientist, has collected 275 billion posts from Twitter and other social media, including the Chinese equivalent of Twitter, said Stephanie Newby, the company’s chief executive. Clients can query the system for tweets with the phrase “selling a house” if they want a feel for the state of the housing market.
In the company’s early days, its clients were from the entertainment, retail and packaged-goods industries, Newby said. But now the firm has Wall Street clients, and it’s hosting a launch event next month in New York to get more.
Seth McGuire, business development director at Gnip, said his firm partners with Twitter, WordPress, Tumblr and a spinoff of Twitter called Stocktwits. His firm collects publicly available posts and streams them to clients in real time.
“The technology we have then allows clients to filter the streams so they can find every tweet that mentions Apple, for instance, but not Samsung,” McGuire said.
The company’s clients include big banks, marketing firms and government agencies, McGuire said. Two years ago, he added, some hedge funds that rely on computer algorithms began seeking Gnip’s technology.
Others in the financial industry say the trend toward greater use of social media is clear - and so are its risks.
“Now that people know they can do that, what I’m fearful of is that we’ll see this over and over again,” said Alexander Tabb, a partner at the financial research and consulting firm the Tabb Group. “Everyone wants the regulators to investigate. What happened? Let’s get all the facts out quickly.”