Last month, the Associated Press‘ twitter account was hacked and a message stating that the White House had been bombed was tweeted. In just 5 minutes, the Dow Jones Industrial average fell 143 points or roughly 1%. Prices quickly rebounded after it was showing to be false. While this was a drop in the bucket compared to 2010’s “flash crash,” it has caused quite a stir showing how vulnerable the system is to false information in the digital age.
A Syrian hacker’s group has claimed responsibility for the hack, but in the mean time, both the FBI and the SEC are investigating the incident. According to the Wall Street Journal, the Securities and Exchange Commission released a statement saying: “Where it appears that the securities markets have been manipulated in violation of the federal securities laws, the SEC should undertake a serious inquiry.”
Obviously, the SEC needs to investigate any situations where the stock market may have been gamed for individual gain. But this one seems like a bit of a stretch to me.
News Reporting in the Social Media Age
We live in an age where everyone rushes to be first without checking to see if they are right. Anyone following such events will remember when Fox News reported that the Supreme Court had overturned ObamaCare and then had to retract the statement after they turned the page. More recently, a major change was reported on Amazon’s policy towards short ebooks. Within a week, there were over a million blog posts on the topic. When I did some searching, I discovered that they all ultimately sited the same forum posting. Finally, a single Kindle author reached out to Amazon customer service and discovered it was false.
In this case, over 3000 people retweeted the fraudulent AP tweet before it was removed a few minutes later. There is big money to be made in being the first and the truth gets trampled by it.
If the SEC is going to investigate this, then they should probably have investigated the ObamaCare case reporting, the Amazon story, and a dozen other such cases each day where broken news isn’t necessarily the actual news.
Cases where false information about a publicly traded company is shared have the potential to be securities fraud. Cases where a foreign cyber-terrorist group is just trying to make headlines by spreading news about a false disaster are probably a waste of time.
The SEC and social media
It was only a few weeks before this event that the SEC released new guidelines allowing companies to release information via social media sites. Prior to that, firms could not use social media sites to share information that was not already posted in a press release or 8-K filing. The restriction is that a company must have previously disclosed which social media sites information will be shared on.
In light of the AP hacking, some are calling on the SEC to reverse that decision and even place tighter restrictions on the use of social media to share market related information. Of course, the tweet contained no market-related information and supposedly had come from a news organization that rarely reports on market-related information beyond news about the market itself.
I can’t see SEC regulation of social media being successful. Whether or not they try, they have little power over individuals that share news online. And non-market information can have a large impact on the market, as this incident proves. The Commission would have to ban traders from trading on news from sources other than official filings. Good luck enforcing that rule.
Of course, the crash could have also been prevented by banning automatic stop-loss orders. At the root, it wasn’t the hack, or the false information that caused Twitter crash. It was automatic trading. Algorithms designed to trade based on information on the news without human interaction started the cascade and automatic stop-loss orders engaged as stock prices started to slip.
In the Michael Flynn sci-fi novel, Lodestar, a recession is triggered when a hacker learns information about some illegal activity by a large company. Based on this information, he directs his “artificial stupid,” a limited AI, to sell all of his stocks in any company related to it. Over the years, he has amassed so much money in the stock market from insider trading on hacked information, and the company had its fingers in so many different pies that the two combined to cause a meltdown of the entire US economy. Pretty prescient for a book written in 2000, huh?
Moving forward, more and more institutional trading is going to be done by machine instead of humans. And they will always be fallible to pranks and misinformation. The problem isn’t going to go away and the SEC doesn’t have the power to block the practice. Digging heads into the sand on the matter won’t change anything. The best we can do is be smart about it.
Do you think the SEC is making the right move in investigating the “Twitter Crash?” Should they be more involved in news released on social media?