Fake Tweet And Algorithmically Twitchy Financial Markets Lead To Market Swing; But Is That So Bad?

from the how-to-create-momentary-financial-havoc dept

Lots of people have been rightfully concerned about just how much of the trading in the financial markets is done algorithmically via high frequency trading systems that execute trades faster than any of us can comprehend, based on various algorithms, trying to shave little bits and pieces of profit. The key worry, of course, is that these algorithms can get into something of an infinite loop problem that spins the markets out of control. We’ve had momentary blips, at times, that happened so quickly it wasn’t even clear why they happened. And now we have a case where overreacting to a fake tweet may have briefly cost the financial markets $136 billion (yes, with a b).

The story is that the Associated Press’s twitter feed was hacked and a bogus tweet was posted, reading: “Breaking: Two Explosions in the White House and Barack Obama is injured.”

And off went Wall Street, sending the stock markets down quite rapidly. Of course, after the report was quickly corrected and shown to be false, the market rapidly recovered — though, in the down and upswings, it’s likely some people lost a fair bit of money while others made out quite well. Still, this raises a different set of questions even on top of the worries about high frequency trading, pertaining to the various inputs it receives. Reacting to stories on Twitter is an interesting way to try to beat the news cycle. Since so many stories break on Twitter first, it’s no surprise that Wall Street is eagerly scanning the service for market-impacting news. The real question is if anything can or should be done about this. One argument is that we can leave it alone because it’s self defeating. If your system jumped the gun and traded down on this report, well, good, you deserve to lose money for trading on a bogus tweet. Similarly, the fact that the market bounced back showed that it can self-correct fairly quickly, even if there are billions to be made and lost in between.

For those who think this is a problem, the bigger question might just be: and, so, what do you do about it? I’m just as worried as the next guy about the problems of such inter-connected, algorithmic trading systems spinning out of control, but I can’t think of any way to prevent it that doesn’t also lead to great collateral damage for more efficient or reasonable markets. That doesn’t necessarily mean there isn’t an answer, but it doesn’t appear that there’s an obvious response, seeing as no one has introduced any. In the end, it may be that this is just a fact of life. People are always going to seek out ways to beat the market by being first. And many times that will lead to great profits. But sometimes, when a story like this comes out, you get burned. Maybe that’s perfectly reasonable.


Companies: associated press, twitter

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Comments on “Fake Tweet And Algorithmically Twitchy Financial Markets Lead To Market Swing; But Is That So Bad?”

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44 Comments
Anonymous Coward says:

Re: Re: Re:

This news station can now carry this exclusive report that there has been no bombing of the Whitehouse and the President is uninjured as some scurrilous people earlier reported.
We are the first with this accurate news as our reporter was able to read to nearly the end of the techdirt article at this point.

Mr. Smarta** (profile) says:

Based on rumors

The markets are based almost entirely on rumors. Rumors that a business is doing well and will return a huge profit makes the stock jump up. Negative rumors make the stocks fall. A single rumor has been known to almost crash a company’s stock just so an employee/ex-employee can sell their stocks for a certain amount. Markets, such as the stock market, is little more than legalized gambling. When you invest, you’re gambling that the company or stock is going to do very well. It’s called risk.

We’re living in a world where everyone wants all of the rewards but none of the risk involved. It’s called ‘entitlement’, and people and/or corporations feel they’re entitled to all of the money in the world (or at least a good sized chunk of it) without any risks. Politicians are bribed to pass laws to help decrease or completely do away with risks. That’s how our world works now.

So it makes perfect sense that one little (or big) rumor can move the markets since people have fear of risk and losing everything.

out_of_the_blue says:

Oooh, I've an easy FIX, Mike!

“I can’t think of any way to prevent it that doesn’t also lead to great collateral damage for more efficient or reasonable markets.” — Simply require that all stocks be held for ONE YEAR before traded. IF the purpose were finance and not casino, then it’s an easy and simple FIX.

You’re some economist, aincha? No opinion on nothin’.

Take a loopy tour of Techdirt.com! You always end up same place!
http://techdirt.com/
Where Mike daily proves the value of an economics degree.
11:31:30[m-962-3]

Suzanne Lainson (profile) says:

Untrustworthy markets

A lot of people are permanently out of the market these days, even as it has hit new highs. There’s an increasingly belief (and rightly so) that the average investor will likely get screwed. True, if you invest for the very long haul and can ride out the ups and downs, it might turn out okay for you. But now, especially with the market not seeming to be connected to the economy at large, the idea that you can invest in good companies and it will pay off seems to have disappeared along with the American dream of getting a good education, getting a decent job, working for 30-40 years, and then retiring comfortably.

These sudden swings, no matter what triggers them, don’t reassure average investors that stocks are the place for them to be.

So is it a problem? It depends on whether you want widespread participation in the market or whether you just want a narrow sector of the population trading back and forth. It’s another indication that the 1% make their money differently than other people.

Suzanne Lainson (profile) says:

Re: Deliberate manipulation

During the dotcom boom, when there were a lot of stock bulletin boards, “pump and dump” was quite common. You had to pay attention to who was giving you “news” on a company to know if it was trustworthy.

But with the rapid trades now, it is increasingly a sucker’s game unless you have ultra-fast computers. It’s sad that some of the best minds in the country have been used to create computer programs to shuffle money around rather than actually doing something to help humanity.

Anonymous Coward says:

Re: Re: Deliberate manipulation

Honestly, security on twitter is quite lax, and that is something that should be done. In fact, they have already admitted that 2 factor authentication will be used from now on. I’m a personal believer in authentication keys, but the general consensus is that it is too complicated for stupid users.

ethorad (profile) says:

Re: Re: Deliberate manipulation

I wondered if it could be deliberate market manipulation as well. Probably just someone having a laugh, but you never know. I bet the SEC is looking into the number of short trades that happened just before the tweet was posted and which were quickly closed out before the market realised the tweet was fake.

And it is wrong to exploit stupid people. A fool and has money may well be quickly parted but when it comes to investment markets at least there are all sorts of rules about what you can and can’t do and say. See insider trading, ponzi schemes, pump and dump, etc

Anonymous Coward says:

Re: Re: Re:2 There is no cyber war

It is very accurate. You can see any number of articles here claiming there is no cyber war, that there are no such things as organized cyber attacks. Yet, here we are, with two groups working together to create what was potentially a serious problem, using cyber warfare methods.

Imagine the Chinese or other enemies of the US using a similar, but more coordinated attack to play the media into falsely reporting a nuclear attack. If the guys doing it for the lulz can pull it off, imagine what someone with a real plan could do.

Techdirt repeatedly denies the existence of cyber warfare and it’s potential effects on the US. It’s a fine example of where Techdirt is entirely wrong.

JMT says:

Re: Re: Re: There is no cyber war

“So anyone who points out that Techdirt got it wrong should shut up?”

No, when Techdirt gets it wrong you should, in a constructive adult fashion, point that out and explain why. In this case though , I see no reason at all to believe TD got it wrong and your comment was a mile away from being constructive or adult, and was just trollish. So shut up.

And if this is what you think amounts to cyber way, I say bring it on. Some over-paid gamblers lost some money and some other over-paid gamblers made some, and the net result was not much of anything. Beats a real war any day.

horse with no name says:

Re: Re: Re:2 There is no cyber war

It’s not about money made or lost. That is a result of the action, not the action itself. The action itself if taken only a bit further could cause significant turmoil in the US. People fell for this one pretty easily, and it was an easy story to check. It’s a proof of concept, that the internet can be used as a weapon.

The Old Man in The Sea says:

Algorithmic control and fast trading

The interesting thing about trading algorithmically is that anyone can do it. What I have found interesting over the years is that the faster the trading process, the more the momentum in either direction.

All it would take is to slow the allowable trades from any source to a specific minimum between trades. Now this has its own problems ensuring this, but averaging the transaction times is one way to force a slow down.

I have spent various amounts of time paper trading (which is a recommended must before using actual funds to trade) to see what happens and I have found that as long as there is some level of being able to see buy/sell trends then the momentum pushing in any direction is lessoned. That is only my view and YMMV.

Every training course I have ever been on in relation to share markets and the various means of trading has always emphasised that it is a form of gambling, there are risks involved. So only use what you can afford, learn before you put money down, and if you find a method that works for you while paper trading then make NO changes to your method when you do lay money down (any changes made will almost certainly guarantee that you will lose your money). And lastly, if the volatility in the market is too much, don’t trade, wait for another day.

And as the cover of “The Hitch Hikers Guide to the Galaxy” says “Don’t Panic”

Suzanne Lainson (profile) says:

Re: Algorithmic control and fast trading

Every training course I have ever been on in relation to share markets and the various means of trading has always emphasised that it is a form of gambling, there are risks involved.

What happened to a lot of Baby Boomers is that they were saving for retirement and then saw their portfolios take major hits several times since 2000. Now they really can’t afford to take more risks and don’t want to get back into the market.

There aren’t really any great investments right now, particularly safe ones, but at least if you hang on to cash, given the low inflation rate, you won’t lose that.

The people who have money to lose, have money (which they are throwing into property, the market, art, and angel investing). A lot of other people don’t any money to lose. As income inequality increases, the participation in the market will likely continue to shrink.

The stock market no longer has an aura as a place to improve your lot in life.

Anonymous Coward says:

Re: Re: Algorithmic control and fast trading

actually, there ARE reasonable investments available, you just need to be careful where you invest. Diversify, for one- the more investments you have, the less a collapse in one will hurt you. Second, do some research on companies before you buy them- are their profits dropping? rising? do they have any debt? dividend? (I like to see at least a 5% dividend)

also, invest for the long-term. Assuming a company isn’t in serious financial trouble, it’ll likely survive for a while. The general recommendation is that you shouldn’t invest in the stock market with money you will need in the next 3-5 years. Why? because over that length of time, stocks tend to rise. (plus, if you know the company is stable, a price collapse is often a good opportunity to buy. why? because long-term, the price will rise up again, and you bought shares on the cheap. That, and it results in a higher dividend yield. ( if the share normally has a dividend yield of $5, with a price of $100, you would normally get a 5% dividend yield ( which is a decent yield) if the price drops to $50, then you buy, you can get a 10% yield. Plus, when the price goes back up, you double your money.

Suzanne Lainson (profile) says:

Re: Re: Re: Algorithmic control and fast trading

actually, there ARE reasonable investments available, you just need to be careful where you invest. Diversify, for one- the more investments you have, the less a collapse in one will hurt you. Second, do some research on companies before you buy them- are their profits dropping? rising? do they have any debt? dividend? (I like to see at least a 5% dividend)

I was talking about someone approaching 65. Yes, if you are young enough and have you enough years ahead of you, then putting money into the S&P 500 is a good idea. But if you are approaching retirement, there are fewer safe places to put your money. Either they are volatile or don’t pay much in the way of a return.

Suzanne Lainson (profile) says:

Re: Re: Re:2 Algorithmic control and fast trading

There was a time when entering retirement people had relatively predictable investments they could make to hold whatever money they had accumulated during their working years: certificates of deposit, AT&T, utilities, government bonds. The overall economy was growing and there were a range of investment opportunities from very conservative to increasingly risky.

Between the change in the world economy (growth is much less assured now) and the changing nature of investments, that range of investment opportunities just isn’t there anymore. And if you look at who is making money, it isn’t the majority of people in the country. They are treading water at best. The population as a whole isn’t reaping any rewards from whatever investment opportunities there are.

art guerrilla (profile) says:

when you look around the stock market for the mark...

…and you don’t see’em, guess what ?
it is YOU, my fine feathered sheeple…

the stock market USED to be what -in effect- kickstarter, etc is today: a means of raising capital for REAL business purposes…
now ? a rigged game for the uber-rich to milk the masses even more; and algo/millisecond trading is simply another tool to do that…

it has NOTHING to do with actually funding businesses on the stock market… when your average algo trade is held for all of 11 seconds, that has NOTHING to do with ‘real’ markets and ‘real’ money…

nope, it is ALL a means of separating the peasants from the few shekels they have left…

art guerrilla
aka ann archy
eof

Suzanne Lainson (profile) says:

Re: when you look around the stock market for the mark...

the stock market USED to be what -in effect- kickstarter, etc is today: a means of raising capital for REAL business purposes…
now ? a rigged game for the uber-rich to milk the masses even more; and algo/millisecond trading is simply another tool to do that…

I’d say that’s how lots of people view it today. Decades ago people formed investment clubs and did their own research and invested in companies that they felt had long term potential.

Now, with trades happening so quickly and for reasons that often have nothing to do with the quality of the corporations, why would people want to put their hard earned cash into the market?

And further, when you see CEOs rewarded even though their companies are doing badly, how much faith should one have in the entire financial system? And of course, there have been the financial bailouts. How many people believe Wall Street knows what it is doing?

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