NEW YORK — For a few surreal minutes, a mere 12 words on Twitter caused the world’s mightiest stock market to tremble. 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 weren’t human. They were computers, selling on autopilot beyond the control of humans.
“Before you could blink, it was over,” said Joe Saluzzi, co-founder of Themis Trading and a 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. More than half of stock trading every day is done this way. Mount Pleasant’s Automated Trading Desk, now owned by Citigroup, is a pioneer in the field.
Markets quickly recovered after Tuesday’s plunge. But the incident rattled traders and highlighted the danger of handing control to the machines. It also raised questions about whether regulators should be doing more to monitor the relationship between social media and the markets.
Irene Aldridge, a consultant to hedge funds on algorithmic programs, said glitches and plunges may be inevitable with trading programs that just count the number of positive and negative words, without any filter. “You can’t ban Twitter,” said Aldridge, author of “High-Frequency Trading,” a guide to algorithmic trading.
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.
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.
Some Wall Street pros were surprised that a single tweet could move markets so much.
Julian Brigden, managing partner of Macro Intelligence 2 Partners, 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. 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. “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 the 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-speed 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.
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.
“The exchanges love speed,” said Bart Chilton, a member of the Commodity Futures Trading Commission, a regulator that has been reviewing high-speed programs. “I’m not so sure that fast is always better.”
Christina Rexrode and Marcy Gordon of the AP contributed to this report.
Trader Christopher Lotito (center) works on the floor of the New York Stock Exchange on Wednesday.×
Notice about comments: