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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