Posted on April 23, 2013 by
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By the way, that is a picture of an actual flying car created by Terrafugia

We wanted flying cars, instead we got 140 characters.

Some of you might recognize the previous line, I guess now is a good time to reflect how much of an impact 140 characters can have in today’s world.

Associated Press’s Twitter account was hacked. The attackers posted a fake tweet claiming that the White House was hit by two explosions and that single tweet sent shock waves through the markets. A single tweet caused the Dow Jones industrial average to fall by more than 150 points and obviously the price of crude oil was affected too. So there you have it, a fake tweet wiped $136 billion from the Standard & Poor’s 500 Index in about two minutes highlighted the risks of the computerized trading that dominates the $18 trillion market.

dow-jones

The attack on AP’s Twitter account and the AP Mobile Twitter account was preceded by phishing attempts on AP’s corporate network. AP hasn’t clarified what exactly they mean by “phishing attack” but something tells me social engineering played a big role in this process.

This is absolutely ridiculous! How can we allow such sources to have the power of such impact? I think are two really important questions that need to be asked.

1. Does this incident indicate the influence of Associated Press on markets?

or

2. Does this incident indicate the influence of Twitter on markets?

Doesn’t matter how you answer those questions, the end result is the fact that we have created a bubble that can easily be burst by trivial elements.

How did we come to this? How did we end up using such easy to manipulate sources of information to have so much influence in our high frequency trading algorithms?

Obviously there will be some that would blame Twitter for its poor security but that shouldn’t be the central focus of the debate. The people who should really be held accountable are the decision makers that allow such relatively unreliable sources to have such a huge influence in their systems.

Mayor Bloomberg should really learn a lesson from this incident, integrating Twitter in your system is not a good decision but equally allowing a single news organization to have such an influence is not a good decision either.

“When news is received, Verify its source & authenticity. Only then should the news be passed on to another.”

Here is one of my favorite comments from HN on this post:

On June 18th, 74,000 French troops led by Napoleon, sizing up to meet 67,000 British and other European Troops 200 miles NE of Paris.

Nathan Rothschild knowing that information is power stationed his trusted agent named Rothworth near the battlefield. As soon as the battle was over Rothworth quickly returned to London, delivering the news to Rothschild 24 hours ahead of Wellington’s courier. A victory by Napoleon would have devastated Britain’s financial system.

Nathan stationed himself in his usual place next to an ancient pillar in the stock market. Knowing he would be observed he hung his head and began openly to sell huge numbers of British Government Bonds. Believing this to mean that Napoleon must have won, everyone started to sell their British Bonds as well. The bottom fell out of the market. Rothschild had his agents buying up all the hugely devalued bonds.

Please leave your opinion in the comments. We will publish them.

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  1. Mike says:

    Time is of the essence. Most of the time these sources are “trustworthy” (for want of a better word). If you lagged other traders due to checking your sources, this will mean that for the large proportion of the time you’re missing possibly significant gains.
    I guess the question is, do the costs (of misinformation, hacking or bad reporting) outweigh the gains (of performing a timely trade)? Only if they do will we see source/authenticity testing being performed.

    • Hi Mike. I think the mainstream media has simply missed the importance of this attack. They all seem to focus on the fact that Twitter was hacked and not about the impact on stocks and trading. They will catch up eventually, but the damage could have already been done!

  2. René de Kat says:

    The last paragraph is the most important lesson imho. Not only readers, but also news websites blindly copy paste articles and most annoyingly: rumours.

    Mass stupidity/hysteria

    • I completely agree René. It’s a shame that investigative journalism seems to be lacking in the online world. Some of the big names in news, reporters and entire networks alike, seem to forget the basics when it comes to writing content for the internet. Rumours rarely make it into newspapers yet pepper their online counterparts!

    • Pageview economy, I guess.

  3. airtonix says:

    It’s actually the users fault for using crap passwords and not thinking anyone will target them.

    People really need to get a clue.

    Magic + water does not make you impervious on the internet.

    • That is a valid point but what if a hacked off employee who had the password did the same thing? Should markets react to it the same way?

      Regardless of security, I think markets should react only on verified information. Social media is an unreliable source of information for financial markets.

    • I think how the account was hacked is a moot point as there are many ways in which an account could get compromised, not just by guessing a weak password! To name a few: data exfiltration, session hijacking, disgruntled employee (ex or current). Having a secure password doesn’t mean you are hacker proof. I think it’s much more pertinent to think about the impact the attack had on the market, and industry, as a whole. People could have made millions from this if it was timed correctly and conducted by a criminal gang!

  4. John Kane says:

    The RadioLab podcast segment on Speed provides insight about timely trades and the cost of hesitation, dependency on automation. http://www.radiolab.org/2013/feb/05/million-dollar-microsecond/

  5. Mark says:

    There are definitely issues of systemic risk in the market that need to be addressed, but this sort of thing is not one of them. The market is made up of buyers and sellers and when a seller chooses to make a decision based solely on a tweet to gain an advantage in the marketplace(even if it appears to be from the AP), then that seller also accepts the risk that the information is inaccurate.

    • Hi Mark.
      Rick Fier, director of equity trading is quoted as saying: “No human believed the story. Only the computers react to something that serious disseminated in such a way”.

      So, personally, I believe it was the automated system which interpreted the tweet and caused the issue. Most companies have procedures in place to prevent trading if a certain percentage drop is reached. So it comes down to provenance of data I guess. People can tell the difference between reality and sarcasm, for example, while computers only do as they’re told… Which is usually not enough. Either way, I feel the tweet should have been questioned before using it to trade with. In my opinion, Social media isn’t reliable enough to use for any form of trading.

  6. Cal says:

    Maybe something on the grid is trying to wake up. Maybe it will say Hell. Maybe it will say O. Maybe it will say Hello.

  7. Cog says:

    I don’t think the fundamental problem is the undue influence of Associated Press or Twitter, but that people are essentially sheep. Something, anything, can spook them, and then they dash about haphazardly.

    With the advent of bigger herds, due to internet, expect bigger stampedes.

  8. Joe says:

    AP is one of the largest news organisations in the world, and disseminates news to a worldwide network of news producers/providers. What the AP says is generally trusted, exactly because it does “verify its source & authenticity” before sending out copy via news wires etc. That is why it is paid so well by so many organisations, because it doesn’t put out false rumours – it puts out verified, checked copy. Calling it “relatively unreliable” is plain wrong.

    Yes, arguably, people shouldn’t trust a single source, and many will attempt to verify with Reuters, PA etc. But generally, when one of those organisations says that something has happened, it has.

    Obviously, with such a major story you’d expect the AP to be right and certainly have checked its sources, and while you should back it up, I’d imagine you could be forgiven for placing your trust in it. AP has broken, and continues alongside the other major news organisations to break some of the biggest stories around the world on a daily basis, and 99.999999% of the time is bang on accurate.

    As Mike said at the top, timing is all-important for trading (to the extent of private fibre optic lines to cut down on milliseconds of trading etc). And, as he pointed out, I’d imagine the reward of your automated system taking tweets from a trusted source (AP’s Twitter account) and making the trades in the case that the White House *had* been hit far outweighs the losses in the actual case that the account had merely been hacked.

    • Hi Joe. I think the operative words here are “independent newsgathering”. Just because someone claims to be a trusted source doesn’t mean they are and no source should be considered infallible.

      • Joe says:

        AP doesn’t claim to be a trusted source. It *is* a trusted source, by nearly every major news publisher in the world. The reasons for which I outlined above.

        I’m not saying AP is infallible, but I’m not sure what you mean by “independent news gathering”. Are you suggesting that every newspaper in the world has journalists independently gathering news at every major event? Because I can assure you, they do not. They rely, just as we do, on sources such as AP, Reuters and PA.

        As far as trustworthy sources for news go – AP is up there. Yes, traders should potentially (*and I’m sure are, at the time we are discussing it) put multiple redundancy checks (e.g. two confirmed sources from reliable news feeds) into their trading algorithms, but as pointed out above, there’s the advantage of time that, when getting it right will pay far greater dividends than the losses encountered when they occasionally get it wrong.

  9. moka says:

    Twitter needs two-factor authentication more than ever.

  10. williams says:

    Twitter has a direct impact on the markets. Here is how I know:

    There are news services that are dedicated to
    delivering important information that could affect markets as quickly as possible. I heard the news from one of these services directly before the market seriously dropped. The important question is why the markets reacted the way they did. There seems to be a sentiment that these sorts of moves are catastrophic and avoidable, but the reality is that these are movements reacting to real information from the environment that will affect the future state of economics. When bad news develops, more efficient markets drop faster in anticipation for this current or future event. This means that the information, or the bad event, has been diffused among the population.

    With the AP situation, the news of such an extreme terrorist act would surely cause unbalance throughout Western economies; disrupting peace, supply chains, and many companies. This would have a direct impact on equities like the DOW. Within two minutes of the fake tweet, it was reported as being fake and the markets rebounded. In fact, I would guess that the majority of people hurt by this volatility spike were market making or algorithmic traders. They either were directly linked to twitter text feeds, selling on the way down and buying at the top of the retracement; or dump positions put on earlier in the morning. Of course, if the event happened, these traders would have been the winners.

    The problem with this current situation is that the high-speed news delivery services spread this fake tweet without any verification (except trust that the AP feed is trust-worthy), and people with direct access to these services were most likely individuals with access to trading accounts, allowing them to drop a variety of assets, most notable the DOW or S&P.

    • I couldn’t agree more! I think the most important lesson to learn from this is how and why the market reacted the way it did… It’s clearly a bad case for automation in such an instance. My biggest worry is what would have happened if it were true… If this were done in a less flashy way, someone could have made millions from the worlds quickest short sell!

  11. Matthew Persico says:

    What does the Mayor in his current capacity have to do with this issue?

  12. The fragility, in this case, seems to be related to the value that we can extract from low-latency decision making. I guess this evidence is as good as it gets that the rush to lower and lower latency decisions has piled on systematic risk. In the same way that regulation limits the minimum pricing increment (to improve liquidity), could we not mandate temporal batching of trades, to provide liquidity at fixed temporal intervals. Admittedly, this would reduce the effectiveness of price discovery, but surely some compromise interval length could be found that balances the needs of effective price discovery with a reduction in overall systematic risk?

    • Yes, I think the solution is probability. Cross referencing information from different nodes (interval length) to assess the plausibility of an event before it triggers certain marks in HFT.

  13. Rick says:

    American society becomes increasingly shallow and spoon-fed. The people are becoming increasingly too lazy to investigate anything. All media moguls know this and perpetuate it because simpletons are easy to control and take money from. Celebrities have become authorities. Ubiquitous mobile technology decreases knowledge and problem-solving skills. I fear for the future of America. I expect more events like the AP Twitter hack and the irresponsible Boston Marathon media reporting to happen. Brace yourselves for chaos.