April 28, 2013

The machines take over

Critics of computerized trading see last week's market plunge – based on a false tweet – as a warning sign.

By BERNARD CONDON and MATTHEW CRAFT The Associated Press

NEW YORK - For a few surreal minutes, a mere 12 words on Twitter caused the world's mightiest stock market to tremble.

click image to enlarge

Humans aren’t involved in more than half of stock trading every day as computer programs execute trades by themselves. After a false report of explosions at the White House on Tuesday, the automatic programs unloaded $134 billion worth of stocks before the market recovered.

The Associated Press

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 of the investors weren't human. They were computers, selling on autopilot beyond the control of humans, like a scene from a sci-fi horror film.

"Before you could blink, it was over," said Joe Saluzzi, co-founder of Themis Trading and an outspoken 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, without slowpoke humans getting in the way. More than half of stock trading every day is done this way.

Markets quickly recovered after Tuesday's plunge. But the incident rattled traders and highlighted the danger of handing control to the machines.

"It's easy to plant a false rumor with machines in their current state," said Irene Aldridge, a consultant to hedge funds on algorithmic programs who teaches computer trading at New York University. She said most trading programs that read news just count the number of positive and negative words, without any filter.

Regulators have complained that these trading programs make it difficult for them to ensure markets don't misfire.

Just how exactly the trading unfolded Tuesday is still a bit of a mystery. Some experts say the computers took their cue from humans, picking up on a pause in buying as traders read the phony tweet. In Wall Street's insanely fast trading world, humans holding back for even a second could have signaled to computers that buyers were drying up and that prices could fall, and so the computers should sell fast.

Others, like Saluzzi, think computers may have sold on the tweet itself. That's possible because computer trading programs are increasingly written to read, and react to, news from social media outlets like Twitter.

Experts say the fake tweet seemed designed to catch a computer's attention.

Ron Brown, head of Elektron Analytics, a Thomson Reuters unit that sells news feeds that computers can read, said the words "explosions" or "Obama" alone wouldn't have triggered selling. But add "White House," and it's a combination even the slowest computer couldn't miss.

Brown said his service doesn't include Twitter in its feeds because there's too much useless "noise" in the deluge of tweets and, given the 140-character limit to tweets, often too little context.

Before the fake tweet appeared on Tuesday, it looked like any other good day on Wall Street. Unexpectedly strong earnings reports from Netflix and DuPont sent the Standard & Poor's 500 stock index up 1 percent at 1,578 with three hours to go in the trading day.

Then, at 1:08 p.m. EDT, a tweet appeared on the hacked AP Twitter account stating that two explosions at the White House had injured President Obama. Stocks immediately started falling, and kept doing so for two minutes. AP quickly announced that its account had been hijacked and the report was false. Prices began to climb again.

A group called the Syrian Electronic Army said it was responsible for the hack. But the claim has not been corroborated.

Whoever was responsible, the damage was big. The Dow lost 143 points, or 1 percent, in two minutes.

(Continued on page 2)

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