[Infowarrior] - Fake Tweet Erasing $136 Billion Shows Markets Need Humans

[Richard Forno]

Fake Tweet Erasing $136 Billion Shows Markets Need Humans

By Lu Wang, Whitney Kisling & Eric Lam - Apr 23, 2013 4:23 PM ET

http://www.bloomberg.com/news/2013-04-23/fake-report-erasing-136-billion-shows-market-s-fragility.html

A false report of explosions at the White House that wiped out $136 billion from the Standard & Poor’s 500 Index in about two minutes highlighted the risks of the computerized trading that dominates the $18 trillion market.

The S&P 500 was up about 1 percent at about 1,578 at 1:07 p.m. New York time today when a posting on the Associated Press Twitter account said there had been explosions at the White House and President Barack Obama had been injured. The benchmark gauge for American stocks erased almost the entire gain, falling as low as 1,563.03 by 1:10 p.m. The index recovered from the plunge within three minutes as the news service said its Twitter account had been hacked and there were no explosions. The S&P 500 ended the session up 1 percent at 1,578.78.

“Trades should not be busted,” Rick Fier, director of equity trading at Conifer Securities LLC in New York, said in a interview. His firm oversees $8 billion in assets. “No human believed the story. Only the computers react to something that serious disseminated in such a way. I bought some stock well and did not sell into it. Humans win.”

Exxon Mobil Corp., Apple Inc., Johnson & Johnson and Microsoft Corp. briefly lost about 1 percent in two minutes before rebounding. The plunge didn’t trigger circuit breakers for individual stocks. Shares for most companies pause for five minutes if they lose 10 percent in five minutes.

Nasdaq OMX Group Inc. doesn’t comment on market moves, Robert Madden, a spokesman for the exchange operator, said by phone. Richard Adamonis, a spokesman for NYSE Euronext, declined to comment. Molly McGregor, a spokeswoman for New York-based International Securities Exchange LLC, and CME Group Inc. spokesman Michael Shore declined to comment. Chicago-based CME is the world’s largest futures exchange.

Dow’s Loss

The Dow Jones Industrial Average (INDU) lost about 145 points before recovering and ending the session 152.29 points higher at 14,719.46. Other markets briefly retreated and then recovered losses. Canada’s S&P/TSX Composite Index slid 0.3 percent and Brazil’s Bovespa lost 0.5 percent in the minutes after the Twitter post.

“It’s one thing for an illiquid stock to do that but how does a multitrillion-dollar market do that?” Walter Todd, who oversees about $940 million as chief investment officer of Greenwood Capital Associates LLC in Greenwood, South Carolina, said in a telephone interview. “That’s very disturbing to me. It’s unnerving.”

Traders said the selloff may have been exacerbated by so- called stop-loss orders, which are placed by investors to automatically sell stocks when declines of a specified threshold are reached.

‘Quite Scary’

“The whole lesson is never do stop-losses,” said Barry Schwartz, fund manager with Baskin Financial Services Inc. in Toronto. He helps manage about C$500 million ($487 million). “That’s what I took from this. Same with the flash crash. Second is I don’t know how markets can react to that news so quickly. It must be programmed computer trading, which is also quite scary,” he said.

“Don’t let computers rule your investments,” Schwartz said.

On the floor of the NYSE on Wall Street in Manhattan, Jonathan Corpina said he immediately called a client who works two blocks away from the White House to confirm the story.

“He did not know what I was talking about,” Corpina, senior managing partner with Meridian Equity Partners Inc., told Bloomberg Radio. “He said I’m staring at the White House and there’s nothing going on here right now,” he said.

‘Snowball Effect’

Algorithmic trading programs that read news headlines may have started the selling, he said. “And then other algos jump in to play the snowball effect, and little by little you have the computer trading systems that have canceled all their orders on the buy side and the sell algos hit all these bids, and that’s the big dip we saw,” he said.

The Chicago Board Options Exchange Volatility Index, or VIX, surged more than 9 percent from 13.6 at 1:08 p.m. to as high as 14.87 at 1:10 p.m. before reversing the gain in the following three minutes. The VIX, which moves in the opposite direction to the S&P 500 about 80 percent of the time, ended the session 6.3 percent lower at 13.48 and is down 25 percent for the year.

Flash Crash Flashback

Today’s plunge reminded many traders of the May 2010 flash crash that briefly erased $862 billion in market value in less than 20 minutes. Regulators and exchanges are altering the speed bumps adopted after that incident in an effort to boost confidence in a market that has become faster and more complex over the last decade. Under the limit-up/limit-down system, which is going into effect gradually for stocks, trades aren’t allowed to occur at more-than specified percentages above or below a stock’s rolling five-minute average price.

The changes are intended to prevent a repeat of the flash crash, which was caused partly by one firm’s trade in stock- index futures, according to a study released Oct. 1 that year by the Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission. The trading algorithm employed by the firm, identified by two people with knowledge of the findings as Waddell & Reed Financial Inc. (WDR), sparked the rapid selling of stock futures because it took into account volume but not price or time, the report said.

Today’s plunge “is different than some market mechanism breaking down or some problem with a broker,” John Carey, a fund manager at Boston-based Pioneer Investment Management Inc., said by telephone. His firm oversees about $208 billion. “This was just a  rumor and there have been lots of rumors over the years that moved prices until people get some confirmation that it was or wasn’t true,” he said. “I would guess that would have just been the beginning of some market drop if it had been a true story. But thankfully it wasn’t.” 

To contact the reporters on this story: Lu Wang in New York at lwang8 at bloomberg.net; Whitney Kisling in New York at wkisling at bloomberg.net; Eric Lam in Toronto at elam87 at bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson at bloomberg.net

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