Magazine article Risk Management

Too Fast for the Market

Magazine article Risk Management

Too Fast for the Market

Article excerpt

On Tuesday, April 23, just after 1 p.m., the Associated Press posted a shocking tweet that read, "Breaking: Two Explosions in the White House and Barack Obama is injured." Given that the news came from such a respected, mainstream source on the heels of the Boston Marathon bombing, it was hard to blame any of the AP's 1.9 million Twitter followers for fearing the worst. Almost immediately, the Dow Jones Industrial Average plummeted more than 140 points, temporarily wiping out some $136 billion in market value.

But, of course, the tweet was a fake.

Minutes after the phony news went out, the AP's corporate communications team rushed to assure the public that the @AP Twitter account had been hacked and that no explosions or injuries had occurred. White House spokesman Jay Carney also confirmed that the president was fine, and the Dow rebounded to its pre-tweet levels. The entire incident lasted only about 10 minutes.

Cybersecurity implications aside, the larger issue is how quickly the news moved stock prices. In recent years, financial markets have started to see more and more of these fleeting and unpredictable market collapses, known as "flash crashes," that come and go within minutes, or even seconds. The original flash crash happened May 6, 2010, when the Dow dropped more than 600 points in five minutes, erasing $850 billion in market equity, before gaining it all back 20 minutes later.

But smaller crashes happen all the time. A day before the AP Twitter hack, for example, Google experienced a flash crash that saw its shares drop 3% in less than a second before recovering, and days later, software maker Symantec watched its market value plummet by $1.7 billion when a three-second crash caused stock prices to drop 11% before it too rebounded. According to a CNN report in March, most stock traders claim that dozens of these mini-flash crashes happen every day.

On the surface, these kinds of crashes seem relatively harmless. No matter how large the loss, the market usually gains back its value rapidly. But investors can be on the hook for devastating losses. During the May 2010 crash, one investor reportedly lost $17,000 because of bad timing when he decided to sell his Procter & Gamble shares just as the company's stock price was dropping more than 30%. …

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