Breakout

Flash Crash Redux! Twitter Hack Triggers Major Warning for Investors

Breakout

Less than a week after Twitter established itself as the fastest (not necessarily most accurate) source for breaking news, a crudely worded headline from a hacked AP account caused an instant plunge in the U.S. markets that wiped out $200 billion in value.

The awkwardly-worded tweet ("Breaking: Two Explosions in the White House and Barack Obama is injured") briefly stunned Wall Street and Main Street alike. But investors barely had enough time to pull the trigger to buy or sell during this 4-minute plunge and subsequent rebound in the stock market.

So what in the name of rigged markets happened? Jeff Kilburg, founder & CEO of KKM Financial and a CNBC contributor, says the action had all the earmarks of a familiar culprit. "This goes back to the high frequency trading world we live in," he states in the attached video.

Kilburg's scenario is that the algorithms used by high frequency traders, or HFTs, scan Twitter for keywords, particularly from sources as generally credible as AP with its 2 million followers. Those programs see words like "bomb," "White House," and "Barack Obama injured" and start trading first and asking questions later, if at all.

HFTs are all about being fast and catching the next microscopic move, often entering orders for millions of shares to test a market, then cancelling after only a partial fulfillment of the order. When such programs track a falling market they leap in to capture the momentum. If a significant percentage of these funds with their enormous orders all start leaning the same way, the result becomes an "air pocket" drop in prices until cooler heads prevail.

For every winner there's a loser. Yesterday the suckers at the table were the prudent, smaller traders with stop orders underneath the market. Those folks may have come home to see the market higher but their portfolios down thanks to HFTs taking out their stop-losses then riding the stocks back up when the all clear was signaled.

This kind of event is so nakedly wrong the government will put a stop to it, right? Nope. The victims are the disenfranchised few and they're up against a sizable group of mega-funds claiming their programmed trading "creates liquidity" in times of crisis. It's a notion Kilburg bluntly dismisses.

The victims aren't just smaller traders. The damage runs through the entire system, jacking up prices and skewing assets to the detriment of the real live humans still attempting to make a living trading stocks or even just building a nest egg.

"It's like people who shoplift," Kilburg explains. "That cost gets passed on to the consumer."

So will yesterday's 300 point round trip finally trigger long-awaited solutions such as capping trading speeds or charging high frequency traders for cancelling those multimillion share orders? Don't hold your breath.

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