Issue of the week: How Twitter fueled a market swoon

A fake report posted by hackers on the Associated Press Twitter feed caused the S&P 500 to drop 0.9 percent.

A single tweet can be enough to cause a stock market crisis, said Christopher Matthews in We learned that last week, when hackers posted a fake report on the Associated Press Twitter feed claiming that Barack Obama had been injured in an explosion at the White House. The AP quickly flagged the tweet as fake, but not before it “sent shock waves through the market,” causing the S&P 500 to drop 0.9 percent and temporarily wiping out $136 billion in stock value. The real culprit behind this latest “flash crash” isn’t a hacker—it’s “the proliferation of high-frequency trading.” Wall Street firms use computer algorithms to make millions of trades per second, triggered by automated scans of news sources-—including Twitter—for specific words or phrases. They make money, but “when the going gets tough, these computers tend to sell quickly and run for the hills, actually reducing liquidity when the market needs it most.”

Don’t blow this out of proportion, said Jared Keller and Evan Applegate in Cases of false tweets and news reports wreaking havoc on the markets are rare. In 2011, for instance, Apple shares dipped just 1 percent (and quickly rebounded) after a false report said that Apple founder Steve Jobs had died. And when a Twitter account impersonating prominent short-seller David Einhorn tried to “induce fluctuations” in Herbalife’s stock in February, the company’s value underwent “no noticeable change.” Still, the AP episode “highlights the potential pitfalls of relying on social networks for tradable information,” especially on the heels of the Securities and Exchange Commission’s announcement that companies can use social media sites, including Twitter and Facebook, “to share market-moving company announcements.”

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