High Frequency Trading and the Hacked Associated Press Twitter Account
Judging by press reporting, the bogus tweet from the Associated Press Twitter account of White House bombs was primarily about the hacking of the news agency. Who did it, when was it Tweeted and retracted, where are the perpetrators from and how the hell did a major news organization fall for what looks like a pretty basic phishing scam. These are important matters that will hold the attention of a self-reflective fourth estate that is absolutely in love with Twitter.
There is another way to look at this event that may well be more important to the public’s interest if not its attention span, such as it is. This event may tell us a great deal about the volatility of events in the real world as powerful technologies interact with one another.
One of the technologies is, of course Twitter, with its immensely broad reach. Information, in often maddeningly brief bursts, can rip around the world. We should be thankful that the avian flu virus is not so nimble.
The alleged hack of AP account by the “Syrian Electronic Army” might not have made much of a dent in the public’s consciousness had it not been that it caused a mini stock market crash of 1% (150 points on the Dow Jones) that recovered quickly. This produced a graph with a sharp spike down and then up that illustrated the effect of the stunning tweet and instantaneous return to reason. Mostly, the stock market aspect was a good visual aid.
And here lies the problem. Most trading of securities and derivatives is accomplished using supercomputers wired directly into exchanges and other venues. They operate at trading speeds well below milliseconds so no human is involved. The trades are dictated by artificial intelligence software.
One element of the HFT system is pattern recognition software that infers motivations and other characteristics of other traders in the markets to pick which ones to exploit. Another element of the system is software that reads data, including Twitter traffic, for key word combinations so that the supercomputers can fly into action within, let’s say, one ten thousandth of a second of the appearance of the words. I am going to go out on a limb, here – I suspect that a tweet that comes from a “verified” Twitter account and includes “Obama”, “White House”, and “bombs” might qualify as a sell-triggering word combination.
It seems that “trending” news and the Dow Jones Average have somehow merged into a single phenomenon.
Once cranked up, the market drop was likely exacerbated by HFTs that may not have yet “seen” the tweet, but most certainly could see other HFTs pulling their ripcords and jumping out of the market. HFT acts like an accelerant in a house fire and yesterday was a fine example.
In this case the prices recovered quickly. So, one might ask, what difference did it make? The problem is that Americans depend on capital investment for jobs and (in the era of securitization) household loans. When HFTs ignite massive price gyrations they render markets unreliable for investors who supply the cash for capital investments.
It would not even be so bad if these market seizures occurred infrequently. However, the difference between yesterday and a normal day is that the whole world could see the spasm. In fact, every trading day is filled with herds of HFTs rushing this way and that, over-reacting to information and then over-correcting for the over-reaction. It has been proven that markets do not reliably translate information into prices as they used to for this reason. This disruption and distortion disquiets investors and companies, governments and households bear the cost.
Call me a Luddite, but I am concerned about the interconnection of information feeds like Twitter and the stock market, with no human presence in between. Human brains are different from software; they discern things differently. CAPTCHA, the process of distorting numbers and letters to screen access to websites, is instructive. People can interpret through the distortion, but computers cannot. The AP tweet was, of course, a distortion that a human might have questioned before selling everything in a mad panic.
If the market drop was caused by the interaction of Twitter and HFT, we should be told, and this relationship should be thought through.