Market Matters Blog

Are there any doubters out there? Anyone willing to argue that high-frequency trading hasn't fundamentally changed how the markets work?

If there are, they got (another) wake-up call today. A group of hackers known as the Syrian Electronic Army successfully hacked into the Associated Press's Twitter account and tweeted that President Obama was injured in explosions at the White House.

The Dow Jones Industrial Average dropped about 140 points, the S&P fell about 16 points, crude oil lost more than 70 cents a barrel and treasury futures spiked even though the tweet was swiftly contradicted by the AP and the White House. Within a matter of minutes the markets returned to previous prices, but I can't help but wonder how much money was lost in the latest "flash crash." I fear the people who will suffer the greatest losses are the small, individual investors that don't monitor their accounts every second of everyday. If the market tripped a stop and pushed them out of a position, there's not much that can be done to help them now.

The AP has more than 2 million Twitter followers and the false tweet received more than 4,000 retweets, NBC reported. That's a large audience -- I'd love to have that much Twitter presence -- but it's not large enough for millions of people to execute trades, causing the market to crash. The crash simply happened too fast.

"It reflects the trading environment that exists these days," DTN Senior Analyst Darin Newsom said. "Watson -- the computer-generated, high-frequency trader -- is driven by headlines and increasingly by headlines on social media sites. Anyone can say anything, triggering computer orders that can’t be stopped."

Apparently some trading programs a) trade headlines from the AP's Twitter account and b) watch for words like explosions, White House and Barrack Obama. Other trading programs could have been triggered by the trading actions of others, but I doubt if we'll ever know that for sure.

"And if it can happen in stocks, it can and does easily happen in commodities," Newsom said, noting that crude oil took a hit in this crash. "The importance to ag is that large scale investment liquidation in one sector seamlessly spills over into other sectors. In other words, given more time, the panic in the Dow would have spread like a virus to commodities. It would have been easy for grains to fall to limit losses in the blink of an eye.

"These events can occur at any time and in any market. It is Chaos Theory on steroids, with nobody knowing how futures events will be skewed."

If you'd like to follow me on Twitter, you can find me @KatieMDTN (https://twitter.com/…). I can't guarantee that I won't be hacked in the future, but I can promise that I'll always point you to solid journalism on all things ag.

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