Fake tweet erasing $136 billion shows markets still need humans

‘Quite Scary’

“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. Same with the flash crash. Second is I don’t know how markets can react to that news so quickly. It must be programmed computer trading, which is also quite scary,” he said. “Don’t let computers rule your investments.”

On the floor of the NYSE on Wall Street in Manhattan, Jonathan Corpina said he immediately called a client who works two blocks away from the White House to confirm the story.

“He did not know what I was talking about,” Corpina, senior managing partner with Meridian Equity Partners Inc., told Bloomberg Radio. “He said I’m staring at the White House and there’s nothing going on here right now,” he said.

‘Snowball Effect’

Algorithmic trading programs that read news headlines may have started the selling, he said. “And then other algos jump in to play the snowball effect, and little by little you have the computer trading systems that have canceled all their orders on the buy side and the sell algos hit all these bids, and that’s the big dip we saw,” he said.

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

Today’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.”

Bloomberg News

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