S&P 500 Index ETF (SPY) daily price chart above for April 23rd, 2013 (click to enlarge)
A fake tweet at 1:07 p.m. today from the Twitter account of the Associated Press saying that Barack Obama had been injured in an explosion at the White House resulted in approx 1% drop in the S&P 500 index erasing over $130 billion in market value.
The decline was exasperated by high-frequency (HFT) and automated algorithmic trading that failed to cross-check or verify the information before trading upon it.
Our research desk like many smart investors did not panic when the markets plunged. We of course started to immediately review our data sources and soon enough realized that no catastrophe had hit the White House. So back to work it was.
However the flash crash did highlight the impact of HFT’s in the market place. Many HFT systems compile a list of news sources like SEC filings, Reuters, and Twitter and comb through these sources looking for specific words or phrases like “earnings” or “explosion” to trigger stock/ETF trades based this information on specific companys or sectors. This is often done automatically without human intervention. Quite efficient and simplistic. Assuming the data is correct that is.
Thankfully the flash crash did not in any meaningful way impact investors. But do expect higher volatility and flash crashes as a norm in the information overloaded algo driven investment world.