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10 May 2013

Social Media Threatens Markets

Social media and high-speed technology continue to affect the economy, with recent cyber-attacks highlighting vulnerabilities in global markets.  The combination of mass communication tools like Twitter and high-frequency trading systems has illustrated a basic weakness within the financial industry, with government and industry regulators searching for a solution.

A Twitter hoax in April caused a drop of $136 billion from the Standard & Poor's 500 Index.  Through a hacked AP account, the tweet claimed President Obama was injured at the White House (Breaking: Two Explosions in the White House and Barack Obama is injured).  Even though the hoax was discovered almost straight away, high-frequency trading systems based on keywords and others responding to trends picked up on the fake news and the market dropped like a brick.  

While the markets recovered in a matter of minutes, the unbalanced power of a single Twitter post has brought up questions about the influence of social media.  The Securities and Exchange Commission (SEC) only recently allowed companies to use social media as a way to broadcast market-moving news, a decision that is now being questioned. 

Since the decision to allow market information via social media, Bloomberg has introduced a feature on its financial data terminals that delivers a stream of relevant Twitter posts to investors.  Brian Rooney from the SEC said this "decision reflects the reality that we were dealing with in that this information is being distributed by companies and investors are consuming it and we needed to get it on the terminal... We’re not in a world where people live in a vacuum.

According to Bart Chilton, a member of the trading commission, global markets are totally unprepared for the influence of social media.  "In 2010, we passed Dodd-Frank, the big financial reform bill, but nowhere in there do they mention high-speed trading or technology...  That’s how quickly markets are morphing. Now, here we are three years later, woefully unprepared said Chilton.

While Syrian hackers are thought to be responsible for the attack, investigators are also looking for any anomalous trades in the immediate lead-up to the incident.  The potential financial rewards of this kind of hoax are obvious, with high-speed algorithms and sharp manual traders more than capable of profiting from these huge moves.

This incident follows another media hoax that influenced the markets recently, when an Australian activist issued a fake ANZ media release on Whitehaven Coal.  While not as far-reaching as the Twitter hoax, activist Jonathan Moylan did manage to temporarily wipe-out over $300 million from Whitehaven Coal shares.  While Mr Moylan did not have any financial interest in the extreme price movements he created, this incident also raised concerns about the intentional manipulation of markets through media.

While the media has always influenced the markets, transmission of information around the world is much faster in the Internet age.  With the speed of technology and scope of social media combined with the increased use of high-frequency trading, we are likely to see more bumps in the road as the financial sector adjusts to this brave new world.