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A hacked Twitter account that caused moments of alarm in the trading world has exposed the reality of social media – it can easily spread misinformation and disrupt stock markets, but those same social networks can clear the confusion almost instantly.

The Flash Crash of 2013 – more flash than crash – has also highlighted a fundamental reality of investing: Stock markets have been crashing for inexplicable reasons for as long as markets have existed.

While Tuesday's sudden dip frustrated those who distrust newfangled ways of communicating market-moving information, it also proved that sources such as Twitter are exceptionally good at making instant corrections, potentially heading off bigger disasters.

This week's dip stood out from most others – including the Flash Crash of 2010, which sent the S&P 500 sliding 8.6 per cent – for how quickly markets were able to recover before any real harm was done.

"In the Flash Crash, nobody knew what was happening. Everybody was left struggling to understand what was driving the selling," said Kevin Mak, director of the Real-time Analysis and Investment Lab at the Stanford Graduate School of Business.

"Here, it was very clear why the market crashed, investors knew it was wrong and they could immediately react."

On Tuesday a group hacked into the Associated Press's official Twitter account, reporting that an attack on the White House had injured President Barack Obama.

The news was erroneous, but nonetheless roiled markets for a few terrifying minutes, adding to concerns that have arisen since the Boston bombings and allegations of an terrorist plan to attack a Via Rail train in Canada.

The Dow Jones industrial average hurtled down about 150 points, erasing an earlier lead. The broader S&P 500 fell nearly 1 per cent in less than a minute.

The White House quickly responded to the hoax, which had been perpetrated by a group calling itself the Syrian Electronic Army. AP also issued a correction, saying it had been hacked, and then shut off its Twitter account.

Markets made a full recovery just as fast as they had fallen and both indexes ended the day with solid gains, but observers have been left to ponder the longer-term consequences of the brief interruption.

For sure, the hoax gave investors and regulators something to think about when it comes to disseminating information through social media.

Sources such as Twitter make hoaxes fast and easy to execute. The Syrian Electronic Army has previously taken credit for hacking the Twitter accounts of CBS News's 60 Minutes and the BBC.

Famous personalities have been impersonated, with Twitter accounts bearing their names. There are hundreds of Justin Bieber accounts, along with fake accounts pertaining to be Prince Charles and Warren Buffett.

It's enough to make investors wonder if social media have disrupted markets with an onslaught of distortions and fabrications.

However, observers are taking a far more upbeat assessment of the day's action.

"The good news is that this was a two- to three-minute aberration in the markets," said Peter Kenny, managing director at Knight Capital Group. "And the good news is that many who are responsible for interacting with the market pulled back. Many who trade markets for a living and manage client executions stepped away from the instant volatility."

Michael Decter, president and chief executive of LDIC Inc., a Toronto-based wealth-management firm, noted that market participants can react all too quickly to information without getting confirmation. "There is a scramble to be the first," he said.

Yet, he added it was easy to find out Tuesday's bombing claim was a hoax. By contrast, during the Crash of 1987, known as Black Monday, there was no single cause and the selling pressure fed on itself as the S&P 500 careened more than 20 per cent in a single day, devastating investors.

On Tuesday, though, the biggest casualties in the market may very well have been the most controversial: High-frequency traders (HFT) who use computers to move in and out of positions in seconds, often in response to various market triggers. "They make money with this element of speed, but it's not a perfect science," Stanford's Mr. Mak said.

Computers scanning for news may have been duped by the hoax and initiated the brief selloff – only to reverse course and buy back at higher prices. "Manually controlled money, for lack of a better word, quickly overpowered the HFT money," Mr. Mak said. But for most investors, whether individuals or institutional funds, with time horizons longer than a few seconds, the Flash Crash of 2013 would have passed unnoticed. "For investors themselves, there was no effect on their wealth from the results of yesterday."



A group hacks the Associated Press's Twitter feed, announcing that an attack on the White House had injured President Barack Obama. Within seconds, the S&P 500 falls about 1 per cent.

Recovery: The news is immediately identified as a hoax and the index recovers within minutes.


A large order to sell "e-mini" futures contracts on the S&P 500 from one mutual fund company is made unusually quickly, raising awareness about high-frequency traders. These super-fast, computer-driven investors added to the selling pressure, creating a feedback loop. The S&P 500 fell 8.6 per cent, and some individual stocks lost almost all of their value.

Recovery: The index returned to pre-crash levels by the end of the day.


The S&P 500 drops 20.5 per cent. The precipitous decline is a head-scratcher to this day, although computerized trading is often blamed.

Recovery: The index took about 18 months to recover.