FLIP SIDE
KEEPING PACE
Andrew Collins
Humanity has a tough time keeping pace with technology . We run into trouble when we embrace our inventions too soon , but also when we adapt to them too slowly . History is littered with examples , and a couple have emerged quite recently .
The competitive nature of business drives many to become early adopters , tempting those who hope to gain some advantage over their slower moving rivals . But early adoption is a risk - many have suffered for embracing technology without caution . Such risk can become widespread , and threaten entire economies , as the threat of being left behind drives everyone else to adopt - without due consideration of consequences .
The April hacking of the Associated Press ’ s ( AP ) Twitter account , and subsequent US stock market plunge , provides a recent example . The story revolves around the use of automated trading : computers trading autonomously on the stock market , without human intervention , based on investment instructions in the form of preprogrammed algorithms .
Hackers - reportedly the Syrian Electronic Army - obtained access to the AP ’ s official Twitter account and posted a hoax tweet stating the White House had been bombed .
“ Breaking : Two Explosions in the White House and Barack Obama is injured ”, the hackers ’ tweet read .
Both the White House and the AP informed the public minutes later that the report was not true . But within three minutes of the hoax tweet ’ s posting , virtually all US markets plunged , according to Reuters .
The news agency said the S & P 500 index ’ s value fell US $ 136.5 billion following the tweet , while the Dow Jones Industrial Average dropped 143.5 points , or 0.98 %. Both the Dow and the S & P regained their previous levels after it was revealed minutes later that the AP had been hacked , according to the UK ’ s Daily Mail .
Jonathan Corpina , a senior managing partner with Meridian Equity Partners , told Bloomberg that algorithmic trading programs that read news headlines may have started the selling .“ And then other [ algorithms ] jump in to play the snowball effect , and little by little you have the computer trading systems that have cancelled all their orders on the buy side and the sell [ algorithms ] hit all these bids , and that ’ s the big dip we saw ,” he said .
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© iStockphoto . com / Berc
This is not the first time algorithmic trading has been blamed for market wipes . The May 2010 ‘ Flash Crash ’ saw the Dow Jones Industrial Average drop about 1000 points , only to recover within minutes . A joint US Securities and Exchange Commission ( SEC ) and Commodity Futures Trading Commission ( CFTC ) investigation found that high-frequency trading ( HFT ) - a form of automated trading - contributed to the sharp price declines in the Flash Crash . ( It is worth noting that , despite the SEC / CFTC report , some actually theorise that HFT may have helped minimise and reverse the 2010 Flash Crash .)
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