Tweet From Hacked AP Account Causes High Freq. Traders To Drop DOW 150 Points

New submitter Mike Lape writes "Stocks plunged and recovered within minutes after the hacked AP Twitter account sent out a tweet that indicated that the White House had been the victim of an explosion and that President Obama had been injured. '...the Dow Jones Industrial Average took a quick 143-point plunge, before recovering most of its losses within minutes. The three-minute plunge triggered by the tweet briefly wiped out $136.5 billion of the S&P 500 index's value, according to Reuters data. Interestingly, Tuesday has been the best day of the week for the blue-chip this year with an average return of 0.46 percent. If the index closes in the black today, it will have been up for the 15th consecutive Tuesday. The last time the Dow rose for 15 straight Tuesdays was in 1927.' An analyst said, 'That goes to show you how algorithms read headlines and create these automatic orders – you don't even have time to react as a human being.'"

Comments

First for banning HFT

[Anonymous Coward]

It serves no purpose.

Re:First for banning HFT

[interkin3tic]

How about we emphasize that it hurts productive industries and threatens the stability of the economy, rather than just say it serves no purpose. We don't want to discourage it simply because it doesn't help anyone but a few people, we want to discourage it because it HARMS the rest of us.

Re:First for banning HFT

[tnk1]

And it probably does do that... but the stabilization is probably offset entirely by the strategies that the HFT algorithms use. In short, many of them are playing a meta-game of "this line will do that because lines usually do these things", as opposed to: "this looks like a good investment because it has good revenue and solid assets".

Re:First for banning HFT

[AuMatar]

Also, they aren't pissing on your leg- they're adding to your leg's liquidity.

Re:First for banning HFT

[Anonymous Coward]

But in this case, the HFT lost money while everyone else made money (those who bought at the cheaper prices). This may be a reason not to use HFT, but it's no reason to ban it.

Re:First for banning HFT

[Anonymous Coward]

That goes to show you how algorithms read headlines and create these automatic orders

No they don't. That would be the most stupid trading strategy ever imagined, you would loose your shirt in less time than you can say "Goolge translate".

What happened is that actual people reacted to the news and the trading algorithms (not necessarily HFT, but trading bots) thought they hit a pattern and amplified the movement. Nobody lost anything except the bot herders that sold at -150 because they trusted their bots. I really can't see how that "hurts productive industries and threatens the stability of the economy" as you say.

Re:First for banning HFT

[llZENll]

We need a new exchange that only executes trades once per month. If a company is on this exchange it is not allowed to be on any other exchanges. Problem solved. If you need your money out early there is a small fee. No more flash crashes, much less speculation, invest in a company due to dividends and growth and not emotionally fabricated stock appreciation.

Re:First for banning HFT

[TsuruchiBrian]

The problem isn't more regulations vs. less regulations. The problem is coherent system vs. incoherent system. You can have less regulation, but then you can't have bailouts. You can have bailouts but then you need more regulation. The problem of the recent financial collapse was that the system wasn't coherent. There was less regulation and bailouts, That's a recipe for disaster. The authoritarians blame the lack of regulations and the libertarians blame the bailouts. Neither is right or wrong. They just prefer moving to different coherent systems.

Re:First for banning HFT

[ackthpt]

internet prank with stock market side effects, or intentional market disruption and subsequent gain? btw this is why I don't read tweets.

It's very revealing in what sort of morons do and base their trading upon it.

Re:First for banning HFT

[NatasRevol]

My uncle-in-law retired early, and well off, by writing scripts that key off certain reports & keywords. Trades in before actual people can, then trades out after ~1/4% change.

Re:First for banning HFT

[alexander_686]

Let’s see, when France enacted their Tobin Tax, prices went down, liquidity went down, and volatility increased. And I have seen studies that argue the opposite.

I don’t think a Tobin Tax is the answer. It is often put forward by people who are suspicious of the chaotic energy of the market and of wealthy people – suspecting it is just a game of no real value. I would say that you were treating the symptoms and not the disease – expect that I am not even sure what the symptom or disease they are trying to cure.

Why not tackle the issue from the other end? For example, index long term capital gains to inflation. This would encourage investors to hold their positions for longer.

Re:First for banning HFT

[jfengel]

Coherence is, I'm afraid, not really an option in a democracy. Every decision is a compromise, and it's not even the same people hammering out the compromise from year to year. The best way to get coherence is to put one person in charge, but the downsides of that are well known.

We can try to design our system to be robust to the failures of democracy, though these days even that seems beyond our reach. We've grown so adept at blaming each other that even the flawed process of hammering out a compromise has become secondary to trying to get a brief moment in which to impose our will on our political enemies while they are down.

Wow!

[MightyMartian]

You know, twenty five years ago, everyone was convinced it would be computers built by the military-industrial complex that would become self-aware and take out the human race. Now I'm beginning to wonder if HFT algorithms will be the ones that do it.

Re:Wow!

[Hentes]

If they are this easy to fool then we have little to fear.

Re:Wow!

[MyLongNickName]

Here's the rub. For someone like me, I couldn't care less about HFT. I am in it for the long haul. I've invested for almost all of my adult life. I don't invest on hunches, instead I buy broadly and then hold for a long time. My investments do about as well as the broad market and I have almost no trading costs. Even if some doofus thinks he can beat the market (no, they can't), he'll eat up 1-2% of his money on fees.

So let folks be stupid and market time and talk about dead cat bounces and triple witching hours and other mumbo jumbo. In the long-run I will beat the vast majority and I will do so with very little effort on my part.

The reality is the only investors who can beat my strategy are active investors who are involved in the management of the assets they own (like Buffett) and those with insider information (real insidr info, not what your brother in law told you at the cocktail party). So, let the market tank for a couple hours, a couple days or even a couple years. I couldn't care less.

Re:Wow!

[alexander_686]

I will point out something to buy and hold investors

The Bid / Ask spread has dropped by 90% in the past 30 years. You used to pay .5% to 2% for each trade – not it basically nothing. Moving to decimalization helped, but it is the HFT that really collapsed the spread. This is even truer for ETFs then for normal stock.

The fees that mutual funds and ETFs (which a lot of buy and hold investors hold) have also collapsed the past 30 years. Specifically for index funds, they have fallen by 90%. There are a lot of reasons for this, but about a quarter to a third is lower trading costs, which can be traced backed to HFT.

So, you save about 1% to get into a investment, and about .25% each year if that investment is a mutual fund.

Re:Wow!

[Algae_94]

I follow similar investment strategies, and here's my take:

Maybe you should know that the big banks who do HFT also co-locate inside the exchanges and front run orders making hundreds of billions per year.

That's very nice that those banks are making money. Front running is illegal already. This practice may affect my purchase prices by a couple pennies if true. That is miniscule compared to the gains realized over holding a good investment long term.

Also, you might want to know that if the market crashes and restarts like today the big banks can get their losing trades reversed and you can't.

If I'm a long term investor, I generally have no trades on a given day, therefore, I have no trading loses to reverse. If I were going to trade an investment, I would have established what I believe the value to be. If the market went awry like today and the prices where not what I thought the values were, I WOULD NOT TRADE DURING A PANIC.

All the profit they're making has to come from somewhere. Are you so certain it doesn't come out of your pocket?

The profit of every company and individual has to come from somewhere. Why would I assume it's at my expense with no evidence that it is?

Get rich quick scheme?

[almitydave]

I almost wonder if it was deliberately done to make a quick buck off a short sell. Sell high, make everyone panic, buy low.

Massive potential for fraud and abuse

[benjfowler]

Everything that we're taught is illegal and unethical, the del boys in the City of London and Wall Street will do anyway.

Wouldn't surprise me in the slightest, if the same sort of self-entitled white collar criminals who brought us Liborgate, arranged for the AP Twitter feed to be hacked, and then primed their HFT bots to start shorting like mad?

Gosh!

[fuzzyfuzzyfungus]

I sure am glad that, unlike crazy neckbeard stuff like bitcoins, Serious Professional economic instruments don't suffer hilariously baseless volatility because some goofy website got hacked...

That would, like, reduce my confidence in the rationality of the market.

1927 + 2 = 1929

[maxwell demon]

"The last time the Dow rose for 15 straight Tuesdays was in 1927."

And two years later it crashed.

Thanks.

[Fuzzums]

I want to thank the stock market, once again, for fucking, I mean speculating with my, no, our economy.
Traders don't give a shit. The man in the street gets fired because stock prices need to go up and up and up and then - oh surprise - they crash.
My world can do without stock market.

Here's the thing

[Sycraft-fu]

Bitcoin moves like a stock (a thinly traded one at that), not like a currency. You are making false equivalence here. This caused a 1% drop in stocks for a couple minutes. Bitcoin has a bid-ask spread higher than 1%. The US Dollar didn't move at all based on this, and indeed changes in value around 2-3% per year.

The criticism of Bitcoin's volatility is highly valid when it wants to be a currency. I wouldn't use stocks as a currency due to their volatility either.

Easy come easy go...

[WaffleMonster]

sell sell sell

NASA reports asteroid on collision course for earth expected to "obliterate" housing market.

sell sell sell

Gold prices expected to reach a 20 year low as Lord Ganesh spotted on Indian TV favoring peanuts over gold.

sell sell sell

Acme Toothpick Company announces it will be laying off 1 million workers as the last tree in the amazon rain forest is cut down.

sell sell sell

North Korea launches devastating nuclear attack against giant sea turtles invading its territorial waters. Fears of radioactive fish expected to have catastrophic effects on east Asian seafood markets.

sell sell sell

Exactly, put a gambling tax on it

[dutchwhizzman]

Don't ban it, tax it as gambling. 50% of profits go to government, losses aren't deductible. If you buy a stock and sell it again within a week, it's considered speculation and subject to gambling tax. This will make high volume trading not impossible, but much harder to actually make a profit with, while actual investors in stock that think companies will make money by honest profits are protected. This is for stocks. Any derivatives are by nature all speculation and should be taxed regardless of how long they are held before being sold, bought or exchanged for actual stock or product.

Re:Exactly, put a gambling tax on it

[lgw]

So, basically, what your saying is "I don't understand most of how the market works, so please ban everything I don't understand." Your post reminds me strongly of a senator writing about copyright on the Internet.