Thursday, May 2, 2013

The Twitter Market Crash: Just the Beginning of the Trouble? [Part One]

Cyberterrorists have a new arrow in their quiver. Their target? America’s economic system.

On April 23, the Associated Press Twitter account reported about a bombing at the White House and sent U.S. securities markets plummeting. With the May 6, 2010 “Flash Crash” – which sent the market plunging and then recovering 1000 points ­– still an imprint in everyone’s mind, the attack sent a wave of fear through Wall Street and market regulators in Washington scrambling for cover.

As it turned out, it was a false tweet: the AP’s Twitter account was hacked.

The damage, however, was done. And the culprits of this Twitter market crash? Well, you might say those responsible for the AP Twitter hack who posted the false news. The Syrian Electronic Army has claimed credit, but we may never know for sure.

But the Syrians? Like a businessman seeking advantage, they’re just turning Wall Street’s self-prescribed business practices against itself.

So, who are the culprits? Here are some of the actions that made this cyber cocktail so ready-to-happen:

The Securities and Exchange Commission’s new rules authorizing the use of social media sites to announce market-moving news. Sophisticated computer algorithms which gather and analyze social media posts and stream relevant data, notices and events to trading firms, all in the space of two to three milliseconds. High-volume, computer-automated trading triggered as a result of this information.

There was also another soft ingredient in the mix. Yuri Milner, a venture capitalist and early investor in Facebook, Twitter, Zynga and other Internet firms, commented on CNBC that this event “clearly demonstrates the power of social media.” He then added, “What also is evident is the strength of Twitter’s level of influence.”

The result of the frenzied trading after the Twitter hack? A $136 billion drop in value of the Dow Jones Industrial Average in twenty seconds. The DJIA, mind you, is not a theoretical gauge of the market. It is comprised of stocks which populate tens of millions of investment and retirement accounts of working Americans.

The Associated Press quickly issued a disclaimer about the Twitter hack, the White House responded all was well, and the Dow regained its footing, ultimately erasing the drop. Those investors who had “sell” orders triggered during the Twitter market crash, however, were now looking at higher prices to repurchase their positions.

The bigger issue relates to how this could happen and what can be done to prevent reoccurrences. One brokerage firm head framed it this way: “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?’”

The next post will address the surprising steps being taken by regulators and the social media-flash trading dangers that loom on the horizon. What do you think can happen?



("Stock Exchange Board" image: audfriday13/FreeDigitalPhotos.net)

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