A little after 1:07 in the afternoon on Tuesday, investors and followers of the Associated Press's Twitter feed saw the words "Breaking: Two Explosions in the White House and Barack Obama is injured" flash across their screens.
- Listen to The Current's item on the latest Twitter-led investing panic here
What had been a positive day of gains on Wall Street was wiped out, as the benchmark Dow Jones Industrial Average lost roughly 140 points — more one per cent — within 90 seconds.
Then, as quickly as it had started, it was over. The erroneous report was rapidly dispelled, the Dow went back to where it was, and everything returned to normal. Everything except shaky confidence in the market, which seems to be battered every few months with a new technology-based crisis that sends indexes reeling faster than humans can form a rational response.
"Before you could blink, it was over," said Joe Saluzzi, co-founder of Themis Trading and an outspoken critic of trading algorithms that are responsible for as much as two-thirds of stock trades on major North American markets today. "With people, you wouldn't have this type of reaction."
Known as "high-frequency traders," the trading systems are essentially vast networks of computers that collectively make trillions of calculations per second. Some are programmed to monitor macroeconomic events in the real world and respond accordingly. Others respond to imperceptible technical movements and place massive buy or sell positions instantaneously. When money can be made by reacting before others can, microseconds matter.
When HF traders respond to each other's large buys or sells, it starts an echo chamber, and that's when sudden sell-offs known as "flash crashes" can occur.
In May 2010, a similar event caused 600 points to vaporize off the Dow in 15 minutes, apparently in reaction to a single large trade that other computers then reacted to. Then last year, Knight Capital was blamed when an error in its trading software moved the value of some of America's largest companies sharply up and down in response to bogus trade orders before humans could intervene.
In August 2012, a phony report from a Russian official's Twitter account reporting that Syrian President Bashar al-Assad had been killed caused oil prices to spike, before moving lower again once the report was disproved.
"There was no waiting to see if any of this was real or not," trader Jonathan Corpina told CBC News' The Current in a recent interview. "The computers kicked into place way too quickly."
Confusion remains as to what exactly happened in markets on Tuesday. Some say the computers picked up on almost imperceptible pauses in human trading, as traders read and digested the bogus tweet. In Wall Street's insanely fast trading world, humans holding back for even a second could have signaled to computers that buyers were drying up and that prices could fall, and so the computers should sell fast.
- Click here to watch Havard Gould's report on The National on the latest 'flash crash'
Others, like Saluzzi, think computers may have sold on the tweet itself. That's possible because computer trading programs are increasingly written to read, and react to, news from social media outlets like Twitter.
Irene Aldridge, a consultant to hedge funds on algorithmic programs, said many of the trading systems just count the number of positive and negative words, without any filter. She wants regulators to do more but believes that glitches and plunges may be inevitable.
As much as humans are prone to overreaction, human traders are sometimes better equipped to avoid panic trades. "We just stopped trading," Corpina says, recalling he actually talked to a client in Washington, D.C., who looked out the window to report nothing seemed to be out of the ordinary at 1600 Pennsylvania Ave.
"We stepped back and took a breath — which we're able to do as human beings, not computers — until we were able to process what was going on."
A group calling itself the Syrian Electronic Army eventually came forward and took credit for the hack. The pro-government group out of Syria has previously hacked the accounts of the BBC, CBS News and FIFA president Sepp Blatter with similar moves in recent months.
In Tuesday's case, it's not believed that the SEA had financial gain at heart, although regulators are looking into that possibility. But with $136 billion worth of stocks moved loved within seconds, clearly the potential for financial abuse is present. It's likely a lot easier to hack a Twitter account than it is to engage in other much more expensive and complicated forms of financial terrorism.
"If they were really smart they might have done this and then shorted some stocks," said professor Ron Diebert, who heads up University of Toronto's digital incubator, the Citizen Lab. "But I doubt that was the intention."
Regardless, the incident underscores some troubling weaknesses in an already wobbly financial market. Julian Brigden of investing consultancy Macro Intelligence 2 Partners said the drop suggested an "unstable" trading environment, one that's dominated by investors too quick to buy or sell without any real investment analysis. "To me, it's indicative of a very dangerous market," he said.
"The exchanges love speed," added Bart Chilton, a member of the Commodity Futures Trading Commission, a regulator that has been reviewing high-speed programs. "I'm not so sure that fast is always better."