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Not so social: High-frequency trading: Twitter speaks,markets listen,and fears rise

The markets recovered in minutes,but the episode has heightened concern among regulators about the combination of social media and high-frequency trading.

Written by New York Times | New York | Published: April 30, 2013 2:23 am

Could the global economy hinge on 140 characters? That is the question the financial industry and government regulators are trying to answer after a Twitter hoax on Tuesday that claimed US 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 US 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 realised 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,” 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 AP 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 AP’s Twitter account was hacked. It is looking to see if there were anomalous trades,and investors who benefited from them.

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