Just after 1 PM on Tuesday, 23 April, the Twitter feed of the Associated Press released a message saying that two bombs exploded in the White House and President Obama had been injured. This turned out to be a fake ““ stemming from a hack ““ but quickly garnered more than 4,000 retweets. Quickly afterwards the AP suspended its Twitter account and notified readers that the tweet was as a result of a hack and is completely false.
So it would seem that there was no harm done, right? Unfortunately, that was not the case. Soon afterwards, the Financial Times reported that this specific tweet had a massive effect on the stock market, wiping out around $130 billion worth of stock in a matter of seconds. That only translates to about a 0.9% decline and it quickly recovered in the minutes thereafter, but it left people again questioning the methods in which stocks are traded in modern times.
These days the floors of stock markets seem like ghost towns when compared to the olden days, with traders pitching stocks and making offers by yelling across the room. Everything these days is done by computer power, with high-frequency trading. That is the practice of large firms using high-powered computers to execute thousands or even millions of trades per second. The aim is to make very small profits on each trade, which obviously adds up very quickly over the period of a trading day.
So, because of this kind of high-frequency trading, the stock market plunged immediately after the fake tweet. Or rather, that is the general feeling, as no one is certain. It is felt that these large volume high-frequency traders on Wall Street are the culprits of the crash, as we‘ve seen in years past with the 2010 “flash crash” and 2012‘s crisis at Knight Capital Management, but more specifically the blame is fixed on the high-frequency traders that use extremely complicated algorithms to continuously scan the internet to sift through news and social media. They then make trades based on the information gathered. They look for specific words or phrases and single out any morsel or information that point to something about a specific company or the market as a whole.
Even though no one really lost much money in the small crash on Tuesday, it is further fuelling the debate regarding high-frequency trading. It is concerning that these traders do try to sell off so quickly that a market can crash, but what we can say for sure, is that this method of trading is here to stay.
Source: Market Watch