On Tuesday, April 23, a fake Twitter tweet via the Associated Press about the bombing of the White House sent the Dow crashing by 143 points for two minutes. A hacker who broke into the AP was responsible and the AP quickly addressed the issue. However, by then, $134 billion worth of stocks had been sold off in a mostly automated, spastic reaction.
It was a dramatic example of how social media not only impacts the markets but how ingrained it has become in our culture and economy. Just last week, wildly inaccurate stories and postings via social media about alleged suspects in the Boston Marathon bombings certainly hurt innocent people and complicated the manhunt for the real suspects.
For Wall Street, I think the problem is that there are algorithms scanning trades, news, tweets and other social media postings for high frequency trading (HFT) platforms that have outpaced regulators, human traders, post-trade processes and common sense. The obvious answer is that such major stories should be validated first before any machine or human unloads stocks that could cost them and their investors dearly. But that isn’t happening.
The problem is that we have essentially set ourselves up for disaster. The algorithms and HFT platforms go for it no matter the consequences and once a firm starts unloading, the activity is immediately picked up other algorithms and HFT systems. The chain reaction is virtually unstoppable.
This is clearly a matter for the regulators who have been grappling with the issue of HFT firms and their impacts. Some experts say that HFT firms are actually good for the markets and others think they are Satan incarnate. Yet there’s no dispute that they are here to stay and that automated trading at ever-faster speeds is part of the landscape.
Simultaneously, social media sites could become more popular and more powerful conduits for public companies to make corporate actions notifications. The SEC has cleared the way for public companies to use Facebook and Twitter for key announcements, and Bloomberg announced that Twitter would be available via its terminals.
It wouldn’t take too great an effort for firms to craft an algorithm that can scan social media for corporate actions announcements. This could effectively challenge the roles of data vendors, service providers and industry utilities in corporate actions. Algorithms of this kind would also spur HFT platforms into action. Of course, there would be horrific consequences if hackers broke into these systems and spread false corporate actions information.
On another level, how would melding HFT and social media for corporate actions impact the DTCC’s efforts to make ISO 20022-based standards for corporate actions a reality? Should the DTCC consider accommodating social media as its overhaul is still in the early stages?
In short, it’s time that financial services firms take social media much more seriously. They have to develop policies and strategies that protect their interests and those of investors—lost again in the shuffle. Firms also have to figure out how to profit from a phenomenon that is only growing and has no intention of going away.
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