The Market's Twitter Jitters
Here's the challenge U.S. financial markets face next week: Open and close for five days straight without a major glitch, trading halt or inexplicable computer blowup that makes the world wonder about the integrity of our high-tech exchanges. This shouldn't be a big challenge, though after this week, you have to wonder.
Just to recount: On Tuesday, a computer hacker broke into the Twitter account of the Associated Press and sent a post that said explosions at the White House had injured President Barack Obama. Before anyone could bother to check whether the claim was accurate, the algorithms built into traders' high-speed computers glommed onto the words in the Twitter posting.
Within a matter of seconds, the major stock indexes did a cliff dive. After two minutes, the plunge in the Standard & Poor's 500 Index had destroyed $136 billion in value. That's as if the too-big-to-fail Bank of America Corp. disappeared from the face of the earth.
Fortunately, everyone figured out pretty quickly that the Twitter post was a hoax, and the AP confirmed the same within a few minutes. The markets recovered almost as quickly as they fell.
Now, it's true that markets have been tripped up by unfounded rumors before. On June 1, for example, a market decline turned into a 275-point rout after reports that Pacific Investment Management Co., JPMorgan Chase & Co. and other major financial companies had suspended employees' summer vacations, in anticipation of the collapse of a major financial institution.
The chatter that day turned out to be false, of course, as it was on Tuesday. But the sheer speed of the Twitter-fed plunge should remind everyone that wealth in the stock market may be more ephemeral than ever.
More troubling than what some are calling the Twitter jitter, was the inability of the Chicago Board Options Exchange to open for 3 1/2 hours yesterday. This had potentially serious implications. The CBOE is a major draw for financial institutions that hedge risks using options. Although most equity derivatives trade on multiple exchanges, the CBOE is the only place where the CBOE's Volatility Index, or VIX, trades. Financial institutions and brokers use it to hedge volatility in the S&P 500. (A question worth asking is whether regulators should allow that exclusivity to persist.)
The CBOE said an unspecified software flaw, and not a cyber-attack, caused the delay. That's a relief in one sense, though the failure to specify just what caused the outage isn't very reassuring. The exchange is operating normally today.
This week's events add to the catalog of unnerving market gyrations, from the so-called flash crash of May 2010, which wiped out 1,000 points on the Dow Jones Industrial Average in less than an hour before it recovered; to the failed order execution on the Nasdaq Stock Market when Facebook Inc. went public last May, which cost traders and investors as much as $500 million; to the $400 million in money-losing buy orders issued by a haywire Knight Capital Group Inc. computer last July, which forced the company to find a buyer to save it.
The Securities and Exchange Commission has proposed rules to try and prevent technology-related breakdowns, focusing on the automated trading systems that now dominate U.S. markets. The proposed Regulation Systems Compliance and Integrity, or Reg SCI, would require exchanges to test systems, provide disaster backup and recovery, alert the SEC when changes are made and tell the SEC when things go awry. You would think that last one shouldn't be necessary, but such is the state of today's financial markets.
(James Greiff is a member of the Bloomberg View editorial board. Follow him on Twitter.)