How One Tweet Almost Broke US Financial Markets

High speed trading by computers creates extraordinary fragility in world financial markets. One tweet created a dramatic instant market drop.

That tweet from the Associated Press twitter account created this drop in the market.

Many high-speed trading algorithms are designed to read headlines and trade based on that information before human traders can react.

The S&P 500 fell nearly 1 percent, wiping out more than $130 billion in shareholder value in minutes.

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."

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.

... 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."

"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."

Bart Chilton, a CFTC commissioner,..., 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. [emphasis mine]

Not only could one hacker bring down the entire financial system, one terrorist who set off two bombs in the White House and injured the president, even slightly, could do the same.

High speed trading creates an inherently unstable economy.

Tags: flash crash, high speed trading

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Replies to This Discussion

Automated trading....  prompted by stupid nonexistent news on Twitter, which has no screening for accuracy and whose brevity is an assurance there is no thought or context.  Pathetic.

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