That is the question the financial industry and government regulators are trying to answer after a Twitter hoax on Tuesday that claimed President Obama was injured in an explosion at the White House. That report caused the Dow Jones industrial average to drop temporarily by 150 points, erasing $136 billion in market value.
The markets recovered in minutes, but the episode has heightened concern among regulators about the combination of social media and high-frequency trading.
The vulnerability, in part, stems from the Securities and Exchange Commission’s decision this month to let companies and executives use social media sites like Twitter and Facebook to broadcast market-moving news.
High-frequency trading systems are designed to make trades based on keywords within milliseconds. The hoax message also went out on a new feature on Bloomberg’s financial data terminals that delivers select Twitter posts to hedge funds, investment banks and other users.
On Tuesday, the Commodity Futures Trading Commission plans to hold a public meeting in Washington with a couple of dozen high-frequency traders to discuss whether there should be additional safeguards to protect against the effects of social media on markets.
Even as markets rebounded on Tuesday, some investors lost money on the quick decline while others made money if they bet on a sharp drop.
“In 2010, we passed Dodd-Frank, the big financial reform bill, but nowhere in there do they mention high-speed trading or technology,” said Bart Chilton, a member of the trading commission. “That’s how quickly markets are morphing. Now, here we are three years later, woefully unprepared.”
The false report (“Breaking: Two Explosions in the White House and Barack Obama is injured”) was posted on Tuesday after Syrian hackers broke into The Associated Press’s Twitter feed.
Immediately, the mood shifted on the floor of the New York Stock Exchange.
“It was nine, 10, 11 seconds and it was fast and then the question was ‘Why’?” said Andrew Frankel, co-president of the brokerage firm Stuart Frankel Company.
He said traders realized shortly after that the post was a hoax since the television screens showing Bloomberg and CNBC had nothing about an explosion at the White House. Still, the episode recalled the 2010 “flash crash,” when an automated trading program caused the Dow to sink more than 600 points, and it left a deep skepticism of social media on the trading floor.
“You look at how quickly that happened and now everyone wants to release corporate earnings on Twitter,” Mr. Frankel said, in between calling out, “Sell!” to his team. He added: “The concern is ‘How do you know what’s right and what’s not? How do you know what’s hacked and what isn’t?’ ”
Spokesmen for Twitter and The A.P. declined to comment.
Even though Syrian hackers remain the prime suspects, the trading commission is now investigating 28 different futures contracts and specifically examining the five-minute period before and after The A.P.’s Twitter account was hacked. It is looking to see if there were anomalous trades, and investors who benefited from them.
“To think it was all lost because of this hack attack is very disconcerting,” Mr. Chilton of the commission said. “We would be irresponsible if we turned a blind eye to these debacles.”
The decision to allow market information on social media came after Reed Hastings, chief executive of Netflix, had posted on Facebook that the service had exceeded one billion hours of streamed video a month, sending its stock price up.
“We appreciate the value and prevalence of social media channels in contemporary market communications, and the commission supports companies seeking new ways to communicate,” the S.E.C. said on April 2.
Two days later, Bloomberg introduced a feature on its financial data terminals that incorporates a stream of relevant Twitter posts delivered to investors. All of Bloomberg’s more than 310,000 subscribers, who pay at least $20,000 a year for access to the terminals, now have access to those posts, which the company says are clearly identified as Twitter messages.
“The S.E.C.’s decision reflects the reality that we were dealing with in that this information is being distributed by companies and investors are consuming it and we needed to get it on the terminal,” said Brian Rooney, the company’s core product manager for news, adding, “We’re not in a world where people live in a vacuum.”
At the same time, the use of algorithms designed to peruse millions of sources of information like blogs and social media to analyze and execute trades is only becoming more widespread.
Article source: http://www.nytimes.com/2013/04/29/business/media/social-medias-effects-on-markets-concern-regulators.html?partner=rss&emc=rss
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