How Social Media Is Affecting The Stock Market

The Hack

The breaking news on April 23 sent shockwaves throughout newsrooms and news junkies. The Associated Press sent out a Tweet that two explosions rocked the White House and President Barack Obama had been injured.

AP Tweet

The news almost immediately made its way to Wall Street. A strong day on the market looked like it went into a tailspin. The Dow Jones Industrial Average plummeted by 143 points within a matter of minutes, causing the world’s most cited stock index to lose $136 billion, according to the Washington Post.

However, the news was quickly debunked and the AP revealed its Twitter account had been hacked by the notorious Syrian Electronic Army. The market rebounded and things went back to normal as quickly as they went haywire, with traders moving on to parsing the latest economic data or rumor about a boardroom coup at some obscure company.

The Danger

The day taught the world two important lessons. First, the AP should do a better job protecting its passwords. But most importantly, the hack/market plunge once again spotlights the importance – and dangers – of social media, which provides instant news in a world that can change with the click of a computer mouse.

In this video interview, Jonathan Corpina, a senior managing partner with Merdian Equity Partners, talks about these dangers with respect to computer-based trading.

“Back in the day, people watched the scrolling news feeds just like we’d watch the scrolling tape. Now, we watch Twitter for information and the scrolling information that comes out from there,” he said.

He continued, “We’re looking at all types of information and data that’s out there. What we have to remember is where this information’s coming from, how was it getting there, and is the information confirmed and is it coming from a good source?”

What’s even more revealing: This video was shown on Nasdaq’s website, an embattled exchange that has shown itself vulnerable to computer glitches like the one that shut down its market recently and also impeded trading of Facebook shares on the day of its initial offering.

Why Did It Happen?

This was a computer problem that went far beyond a Syrian computer expert somehow figuring out the AP’s password and causing a brief panic among guys on a trading floor – far beyond.

This also shows the importance – and fright – that comes from high frequency trading. Usually dubbed HFT for short, high frequency trading allows computers to do most of the investing work. Programmers develop complex formulas that buy and sell millions of shares of company stocks within the blink of an eye.

High frequency trading

High frequency traders have Twitter-feed updates that use phrases about corporate mergers, links to SEC releases and other business news into their algorithms. And now, it’s also apparent that many of these computer programs can now interpret really bleak, awful news from news sources like AP when providing updates on Twitter.

We now live in a world where keywords like “White House”, “Obama”, “explosion” and “injured” are placed into some computer language and, when they appear on a reputable Twitter feed, trigger a massive sell-off of company shares.

There will always be bad news. And there’s no end in sight to the new way market trading works. It’s scary to think – or in this case, witness – the kind of power a hacker can have with a Twitter password. It’s even scarier to think of the effects that a simple tweet or Facebook post could have on our financial markets.

So what do you think needs to be done to prevent this from happening again? Stricter High Frequency Trading regulation? Tighter social media security? Let us know in the comments section below. 

Learn more about the problems with High Frequency Trading in this tell-all book by Haim Bodek, Goldman Sachs insider and foremost expert in HFT. 

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One response to “How Social Media Is Affecting The Stock Market”

  1. […] When you add social media to this equation, things like tweets and other breaking news on social media becomes a lot more relevant. Last year, the Associated Press tweeted the following. […]