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Human Beats Machine This Time as Fake Report Roils Stocks
By Whitney Kisling, Eric Lam & Nina Mehta - Apr 24, 2013 8:31 AM GMT+0700

When a false report of explosions at the White House instantly wiped more than $136 billion off the value of U.S. stocks, Jonathan Corpina didn’t need a powerful computer.

He used the tool favored by traders for more than a century: a telephone. Corpina, senior managing partner with Meridian Equity Partners Inc. who works on the floor of the New York Stock Exchange, called a client two blocks from the president’s house.

Enlarge image Meridian Equity's Jonathan Corpina
Meridian Equity's Jonathan Corpina Meridian Equity's Jonathan Corpina Scott Eells/Bloomberg
Jonathan D. Corpina, senior managing partner of Meridian Equity Partners Inc., right, works at the New York Stock Exchange (NYSE) in New York on Nov. 2, 2012.

Jonathan D. Corpina, senior managing partner of Meridian Equity Partners Inc., right, works at the New York Stock Exchange (NYSE) in New York on Nov. 2, 2012. Photographer: Scott Eells/Bloomberg
“He did not know what I was talking about,” Corpina told Bloomberg Radio yesterday. “He said ‘I’m staring at the White House and there’s nothing going on here right now.’”

There was something going on in the market, with the Standard & Poor’s 500 Index reversing a 1 percent rally after a hacker got hold of an Associated Press Twitter account and sent a post claiming explosions had injured President Barack Obama. The plunge has drawn scrutiny to the computerized systems that dominate the $18 trillion U.S. market, including programs that base trading decisions on news headlines, and the role of humans in managing them.

The incident is also raising concerns over trustworthiness of information spread via the microblogging site less than a month after social media received the blessing of regulators to be a conduit for market-moving news. Luis Aguilar, a commissioner with the Securities and Exchange Commission, said he has asked staff to look at whether the hacking was done with the aim of manipulating the market.

Retreat, Rebound
The S&P 500 was up 1 percent at about 1,578 at 1:08 p.m. New York time yesterday before the post on the AP Twitter account sent stocks lower. The benchmark gauge for American stocks erased almost the entire gain, falling as low as 1,563.03 by 1:10 p.m. and wiping out about $136 billion in market value from companies in the index.

The index recovered from the plunge within three minutes as investors determined the post was incorrect and the news service confirmed that its Twitter account had been hacked and there were no explosions. The S&P 500 ended the session up 1 percent at 1,578.78 as better-than-estimated earnings and growth in home sales lifted stocks.

Corpina and other traders said the dip in stocks may have started when program-trading systems ingested the fake news and canceled buy orders while automated sell orders looked to dump shares.

‘Humans Win’
“No human believed the story,” Rick Fier, director of equity trading at Conifer Securities LLC in New York, said in an interview. His firm oversees $8 billion in assets. “Only the computers react to something that serious disseminated in such a way. I bought some stock well and did not sell into it. Humans win.”

None of the stocks in the S&P 500 (SPX) gained between 1:08 p.m. and 1:10 p.m., with 136 companies declining at least 1 percent during that period. Washington Post Co. was unchanged for the two minutes, while Gilead Sciences Inc. dropped 2.1 percent for the biggest loss among the 500 members.

Exxon Mobil Corp., Apple Inc., Johnson & Johnson and Microsoft Corp. briefly lost about 1 percent in two minutes before rebounding. The plunge didn’t trigger circuit breakers for individual stocks. Shares for most companies pause for five minutes if they lose 10 percent in five minutes.

“It was a very efficient selloff that was met with an equally efficient rebound,” Peter Kenny, managing director for institutional sales at Knight Capital Group Inc., a financial services company in Jersey City, New Jersey, said in a phone interview. “It gave everyone on the desk a very brief moment to consider the news, the likelihood of the news and to not overreact. The default was pause and assess, not react.”

Wide Impact
The Dow Jones Industrial Average (INDU) lost about 145 points from its level at 1:08 p.m. before recovering and ending the session 152.29 points higher on the day at 14,719.46. Other markets briefly retreated and then recovered losses. Canada’s S&P/TSX Composite Index slid 0.3 percent and Brazil’s Bovespa lost 0.5 percent in the minutes after the Twitter post.

The Chicago Board Options Exchange Volatility Index, or VIX, surged more than 9 percent from 13.6 at 1:08 p.m. to as high as 14.87 at 1:10 p.m. before reversing the gain in the following three minutes. The VIX, which moves in the opposite direction as the S&P 500 about 80 percent of the time, ended the session 6.3 percent lower at 13.48 and is down 25 percent for the year.

Automated Trading
Stock markets have become predominantly electronic over the last 15 years as technology costs fell, rules changed and computers that match orders replaced human traders. Algorithms, which buy or sell larger orders in smaller pieces across venues, automated a process previously handled by individuals as the complexity and speed of markets increased.

Some trading firms incorporate data feeds designed to identify market-making news into algorithms so they can try to buy or sell before the information is widely disseminated. Bloomberg LP, the parent of Bloomberg News, provides news feeds for use by algorithmic and computerized trading systems. News Corp.’s Dow Jones unit, Thomson Reuters Corp. and other vendors supply similar feeds.

“This is early in the game for algos integrating news feeds,” Robert Stowsky, senior analyst at Boston-based research firm Aite Group LLC, said in an e-mail. “Inclusion of verification from a second trusted source is inevitable as news- based algos evolve. Technology will continue to accelerate and amplify market response to external events, real or imagined.”

‘Very Disturbing’
Nasdaq OMX Group Inc. doesn’t comment on market moves, Robert Madden, a spokesman for the exchange operator, said by phone. Richard Adamonis, a spokesman for NYSE Euronext, declined to comment. Molly McGregor, a spokeswoman for New York-based International Securities Exchange LLC, and CME Group Inc. spokesman Michael Shore declined to comment. Chicago-based CME is the world’s largest futures exchange.

“It’s one thing for an illiquid stock to do that but how does a multitrillion-dollar market do that?” Walter Todd, who oversees about $940 million as chief investment officer of Greenwood Capital Associates LLC in Greenwood, South Carolina, said in a telephone interview. “That’s very disturbing to me. It’s unnerving.”

Traders said the selloff may have been exacerbated by so- called stop-loss orders, which are placed by investors to automatically sell stocks when declines of a specified threshold are reached.

“The whole lesson is never do stop-losses,” said Barry Schwartz, fund manager with Baskin Financial Services Inc. in Toronto. He helps manage about C$500 million ($487 million). “That’s what I took from this.”

Flash-Crash Flashback
Yesterday’s plunge reminded many traders of the May 2010 flash crash that briefly erased $862 billion in market value in less than 20 minutes. Regulators and exchanges are altering the speed bumps adopted after that incident in an effort to boost confidence in a market that has become faster and more complex.

Under the limit-up/limit-down system, which is going into effect gradually for stocks, trades aren’t allowed to occur at more-than specified percentages above or below a stock’s rolling five-minute average price.

The changes are intended to prevent a repeat of the flash crash, which was caused partly by one firm’s trade in stock- index futures, according to a study released Oct. 1 that year by the Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.

Trading Algorithm
The trading algorithm employed by the firm, identified by two people with knowledge of the findings as Waddell & Reed Financial Inc. (WDR), sparked the rapid selling of stock futures because it took into account volume but not price or time, the report said.

Yesterday’s plunge “is different than some market mechanism breaking down or some problem with a broker,” John Carey, a fund manager at Boston-based Pioneer Investment Management Inc., said by telephone. His firm oversees about $208 billion. “This was just a rumor and there have been lots of rumors over the years that moved prices until people get some confirmation that it was or wasn’t true,” he said. “I would guess that would have just been the beginning of some market drop if it had been a true story. But thankfully it wasn’t.”

To contact the reporters on this story: Whitney Kisling in New York at [email protected]; Eric Lam in Toronto at [email protected]; Nina Mehta in New York at [email protected]

To contact the editor responsible for this story: Lynn Thomasson at [email protected]