Manipulation, Terrorism or Blowback: Is Twitter a Regulated Newsfeed?
By Alexander Tabb, TABB Group
Originally published on Tabb Forum
Everyone within the institutional capital markets knows that we exist in a hyper-sensitive, latency-dependent world in which time is no longer measured in minutes or seconds, but milliseconds and microseconds. So it is no real shock that the hack of the AP newswire Twitter feed Tuesday had such an immediate and discernible, but short-lived, impact.
At 1:07 pm (EST) unknown parties appeared to have gained unauthorized access the AP Newswire Twitter feed and tweeted to approximately 2 million followers that two explosions occurred in the White House and that President Barack Obama was injured. Subsequent to the tweet, the @AP Twitter account was suspended. But the damage had been done.
Immediately following the tweet, the markets reacted, with the S&P dropping approximately 11 points (~0.6%) and the Dow Jones Industrial Average dropping 144 points, or ~1%. Each rebounded within minutes, but millions of dollars were potentially gained or lost in the upheaval. During the disruption, S&P ETF volume increased dramatically, clearly indicating how sensitive the markets are to significant or potentially catastrophic events.
This gets to the real question: Was today’s hacking an attempt to manipulate markets, financial terrorism, or just an unforeseen side effect of an Internet hoax?
The case for market manipulation seems a bit weak. While it is true that the markets reacted with a rapidity that many will find scary, the AP Twitter account and the markets are too many steps removed from each other to ensure that hacking the account would in fact create this type of disruption. There likely are too many variables at play for a premeditated market manipulation event to make sense. However, the SEC and others will look at this closely, and if this was indeed an attempt at market manipulation, they will make every effort to uncover the truth behind it all.
As for financial terrorism, once again it is possible, but less probable. Though the Syrian Electronic Army claimed responsibility minutes after the hack, their motivation appears to be more geopolitical or cultural than financial. And again, the linkage between the AP Twitter feed and the markets is just too tenuous for me to believe that financial terrorism was the intended end goal. In addition, while the effect was significant, it was localized and short lived. Yes, individual investors and institutions were impacted; but the level of that impact has yet to be fully realized.
This leaves the third possibility – the perpetrators were looking to fulfill some as-yet-unknown goal, with the impact on the financial markets merely unintended. In the intelligence world that is called ‘blowback’; in the markets, oftentimes it is characterized as a ‘black swan’ event. Either way, an educated individual could assume that the events, while related, were not intended. Yes, the perpetrators were interested in creating havoc with their message; but the message’s impact on the markets could be looked at as an unforeseen consequence.
For me, the larger implications of the AP Twitter hack are driving my interest in the story. The fact that current events affect the markets is nothing new; as long as there have been exchanges, they have been impacted by outside events – from weather and war, to famine and the false reporting of an attack on the White House. What is new is the speed with which this now occurs. Back in 1849, the news traveled as fast as Paul Julius Reuter’s carrier pigeons; today, it moves as fast as a Tweet.
News analysis, webcrawlers, and the mining of unstructured information are just the logical conclusion of what started in 1849. Today, tweets and any other content added to the web are analyzed for their financial impact and digested in hours, minutes and, increasingly, milliseconds.
Tuesday’s micro-disruption, however, was not created by trading algorithms or smart order routers; they were just one part of a chain of events that was set off by the hijacking of AP’s Twitter account. The root of the problem lies not with automation, but with the more macro concepts of what constitutes a data feed and how a feed should be secured. This failure was one of security and procedure, not market structure.
Markets react to news – that is their purpose. Today’s events exposed a vulnerability not in the fast-paced, hyper-news sensitive market environment, but in what essentially is a news feed. Historically, news feeds were expensive infrastructures built by large market data complexes. Today, news feeds can be developed by people, organizations, and businesses by just signing up for a Twitter account. How do we secure that?
So what was the end-game of Tuesday’s attack? It is too early to tell. But I can already envision attorneys gathering in conference rooms throughout the city. And you can bet your bottom dollar that regulators (both financial and non-financial), government agencies and SROs will be pouring over the events, trying to understand exactly what happened. Certainly, a full review and analysis of how the events unfolded and what can be done to ensure that other sources of validated news are not compromised in the future is warranted. And I can only assume that news agencies and trusted sources of information such as the AP will move to a more restrictive regimen, controlling who has access to their accounts and where official tweets can originate (e.g., limiting outgoing tweets to a specific IP address or device), and avoiding “Password123” and other hackable credentials.
No matter how soothing a regulatory answer would be, though, at the end of the day, this event is all about how markets react to news, legitimate or not. And while it would be great to outlaw the dissemination of lies (oh, wait, it is outlawed), it may not always be possible to stop. And if you are trying to stop markets from reacting to news – be it real or fake – good luck, as news has financial impact, and the markets are the mechanism we use to price this impact.
That said, the faster we react to news, the faster we can either get it right or get it wrong. After all is said and done, if you live by speed, sometimes you die by speed. But if you’re careful and patient and have the right risk controls, hopefully you survive till tomorrow.