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’s easy to plant a false rumor with machines in their current state,” said Irene Aldridge, a consultant to hedge funds on algorithmic programs who teaches computer trading at New York University. She said most trading programs that read news just count the number of positive and negative words, without any filter.
Regulators have complained that these trading programs make it difficult for them to ensure markets don’t misfire.
Just how exactly the trading unfolded Tuesday is still a bit of 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.
Ron 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 from Netflix and DuPont sent the Standard and Poor’s 500 stock index up 1 percent at 1,578 with three hours to go in the trading day.
Then, at 1:08 p.m., 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 kept doing so for two minutes. AP quickly announced that its account had been hijacked and the report was false. Prices began to climb again.
A group called the Syrian Electronic Army said it was responsible for the hack. But the claim has not been corroborated. The FBI has opened an investigation into the incident, spokeswoman Jenny Shearer said.
Whoever was responsible, the damage was big. The Dow lost 143 points, or 1 percent, in two minutes. In the frenzied selling, oil prices dropped, gold rose, the dollar rallied and the price of Treasurys, seen by many investors as a hiding spot, shot higher, briefly knocking yields to their lowest level of the year.
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.
Both the S&P 500 and the Dow Jones industrial average lost 2 percent last week, their biggest weekly drops in five months. Investors were reacting to slowing Chinese economic growth, plunging commodity prices and mixed earnings reports from big U.S. companies. A measure of likely future swings in stocks — what’s known as the “fear” index, or VIX — jumped 40 percent at one point last week.
The Boston Marathon bombing added to the jitters.
“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 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-frequency trading came under public scrutiny following the “flash crash” of May 6, 2010, when a glitch erased 600 points from the Dow Jones industrial average 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 of Thomson Reuters 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 Securities and Exchange Commission cleared companies to release key announcements on Twitter, Facebook and other social-media venues. Bloomberg also added Twitter to its terminal, a fixture on every big bank’s trading floor.
Johan Bollen, an associate professor of informatics and computing at Indiana University, said Twitter is more useful for getting a sense of public opinion. A study he co-authored in 2010 tied the overall mood of tweets to the direction of the Dow Jones industrial average and made a splash among managers of hedge funds.
But Bollen warned that mood is one thing, news is another.
“If you want to trade on the news from Twitter, you run the risk of trading on false data, even deliberately false data.”
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.
Aldridge, the computer trading consultant, said regulators should beef up their monitoring of Twitter, but that glitches and plunges may be inevitable in the brave new digital age. “You can’t ban Twitter,” she said.
Bart Chilton, a member of the Commodity Futures Trading Commission, another regulator overseeing markets, said government investigators will find that high-speed trading programs “will have been all over this trading time period.”
The CFTC has been examining high-speed programs to gauge their importance in the markets and consider possible new rules for them.
“The exchanges love speed,” Chilton said. “I’m not so sure that fast is always better.”