HOW A PHONY TWEET AND COMPUTER TRADES SANK STOCKS

NEW YORK – For a few surreal minutes, a mere 12 words on Twitter caused the world’s mightiest stock market to tremble.

No sooner did hackers send a false Associated Press tweet reporting explosions at the White House on Tuesday than investors started dumping stocks – eventually unloading $134 billion worth.

Except most of the investors weren’t human. They were computers, selling on autopilot beyond the control of humans, like a scene from a sci-fi horror film.

“Before you could blink, it was over,” said Joe Saluzzi, co-founder of Themis Trading and an outspoken critic of high-speed computerized trading. “With people, you wouldn’t have this type of reaction.”

For decades, computers have been sorting through data and news to help investment funds decide whether to buy or sell. But that’s old school. Now “algorithmic” trading programs sift through data, news, even tweets, and execute trades by themselves in fractions of a second, without slowpoke humans getting in the way. More than half of stock trading every day is done this way.

Markets quickly recovered after Tuesday’s plunge. But the incident rattled traders and highlighted the danger of handing control to the machines. It also raised questions about whether regulators should be doing more to monitor the relationship between social media and the markets.

Irene Aldridge, a consultant to hedge funds on algorithmic programs, said many of the trading systems just count the number of positive and negative words, without any filter. She wants regulators to do more but believes that glitches and plunges may be inevitable.

“You can’t ban Twitter,” said Aldridge, author of “High-Frequency Trading,” a guide to algorithmic trading.

Just how exactly the trading unfolded Tuesday is still a bit of a mystery.

Some experts say the computers took their cue from humans, picking up on a pause in buying as traders read the phony tweet. In Wall Street’s insanely fast trading world, humans holding back for even a second could have signaled to computers that buyers were drying up and that prices could fall, and so the computers should sell fast.

Others, like Saluzzi, think computers may have sold on the tweet itself. That’s possible because computer trading programs are increasingly written to read, and react to, news from social media outlets like Twitter.

Experts say the fake tweet seemed designed to catch a computer’s attention.

Rich Brown, head of Elektron Analytics, a Thomson-Reuters unit that sells news feeds that computers can read, said that the words “explosions” or “Obama” alone wouldn’t have triggered selling. But add “White House,” and it’s a combination even the slowest computer couldn’t miss.

Brown said his service doesn’t include Twitter in its feeds because there’s too much useless “noise” in the deluge of tweets and, given the 140-character limit to tweets, often too little context.

Before the fake tweet appeared on Tuesday, it looked like any other good day on Wall Street. Unexpectedly strong earnings reports sent stocks in the Dow Jones industrial average up 1 percent to 14,697 with three hours to go in the trading day.

Then, at 1:08 p.m. EDT, a tweet appeared on the hacked AP Twitter account stating that two explosions at the White House had injured President Barack Obama. Stocks immediately started falling and tumbled for two minutes.

The Dow dropped from 14,697 to 14,554, losing 143 points, or 1 percent. In the frenzied selling, oil prices dropped, gold rose, the dollar rallied and the price of Treasury notes, seen by many investors as a hiding spot, shot higher, briefly knocking yields to their lowest level of the year.

The AP quickly announced that its account had been hijacked and the report was false. The Dow began to climb again, recovering all its losses by 1:18 p.m. That was 10 minutes after the fake tweet, according to FactSet, a financial data provider.

A group called the Syrian Electronic Army said it was responsible for the hack. But the claim has not been corroborated. The FBI and the Securities and Exchange Commission said they had opened investigations into the incident.

Some Wall Street pros were surprised that a single tweet could move markets so much.

Julian Brigden, managing partner of Macro Intelligence 2 Partners, an investment consultancy, said the drop suggested an “unstable” trading environment dominated by investors too quick to buy or sell without any thought.

“To me, it’s indicative of a very dangerous market,” he said.

Though stocks eventually recovered for the day, investors have been on edge recently.

“People are looking for a reason to sell, and (Tuesday) it was a fake tweet,” said Adam Sussman, head of research at Tabb Group, a research firm. “Of course, once they realized it was fake, they bought back in, or they stopped selling.”

But he thinks humans played only a minor role in the stock plunge. He said most professional investors are too savvy to sell on a tweet.

“They’d get a tweet from AP and then say, `Oh, was there a corroborating tweet from Bloomberg? A corroborating tweet from Thomson Reuters?’ and so forth,” he said. “So I don’t believe that anyone selling substantial money saw that tweet and just began selling off billions of dollars.”

Joe Fox, founder of online brokerage Ditto Trade, said the selling was too fast for humans to have pulled off, and computers were to blame.

“Whoever this jerk (who wrote the tweet) is probably cost some people millions of dollars in a matter of minutes,” he said.

Computer programs have come to dominate stock-market trading over the past 20 years. The goal is speed, and it’s led to an arms race as companies develop ever-faster programs. High-speed trading came under public scrutiny following the “flash crash” of May 6, 2010, when a glitch erased 600 points from the Dow in five minutes.

One of the latest weapons in the arms race is machine-readable news. The Thomson Reuters service, one of the more popular offerings, scans 50,000 news sources and 4 million social media sites for stories.

Brown says his programs take news articles and announcements and automatically flag answers to the essential questions – who, what, where, when and why. The answers are translated into a code that an investment firm’s trading program can understand and then sent to clients. All of that takes less than one-thousandth of a second.

It’s up to the investment fund to place a value on each word and rank established news outlets over other sources like blogs or social media websites, Brown said.

Tapping into the stream of comments on Twitter has become increasingly popular. Earlier this month, the SEC cleared companies to release key announcements on Twitter, Facebook and other social-media venues. Bloomberg also added Twitter to its terminals, a fixture on every big bank’s trading floor.

Regulators have been studying the problems posed by automatic computer trading for years. Last month, the SEC proposed tighter oversight of automatic trading. Stock exchanges would be required to test their trading systems routinely, and report to the SEC about problems that could damage trading, like hacking.

“The exchanges love speed,” said Bart Chilton, a member of the Commodity Futures Trading Commission, a regulator that has been reviewing high-speed programs. “I’m not so sure that fast is always better.”

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Asian markets fall after US, Europe declines

A couple walks by an electric stock index display of a securities firm in Tokyo Monday, Feb. 4, 2013. Asian stock markets were mostly higher Monday as investors continued to feel confident about stocks following last week's U.S. jobs report and Wall Street's rally. However, the Asian markets fell on Tuesday, Feb 5, 2013 after declines were reported in US and European markets. - AP Photo

BEIJING: Asian markets fell Tuesday following declines on Wall Street and in Europe amid concern about the political outlook for Spain and Italy.  

Oil prices fell amid jitters about the ability of European governments to keep their finances stable.

The regional heavyweight, Japan’s Nikkei 225, dropped 1.3 per cent to 11,116.44. China’s Shanghai Composite Index lost 0.6 per cent to 2,413.16 while Hong Kong’s Hang Seng tumbled 1.6 per cent to 23,311.01. Australia’s S&P/ASX 200 lost 0.4 per cent at 4,890.40.

”Caution will prevail in the near term,” said Credit Agricole CIB in a report.

Benchmarks in Singapore, Taiwan, Indonesia and Thailand also fell.

In China, the economy is limping out of its deepest slump since the 2008 global crisis but optimism has been tempered by warnings the recovery could be threatened if trade or investment weakens.

A business group, the China Federation of Logistics & Purchasing, said its index of service industry activity rose marginally to 56.2 in January from 56.1 in December.

The measure of new orders declined, which ”casts doubt on the strength of the recovery in the service sector,” said Nomura economist Zhiwei Zhang in a report.

In Hong Kong, Sinopec Corp. plummeted 3.9 per cent after the Chinese state-owned oil company, Asia’s biggest refiner, said it was raising $3.1 billion through a share placement.

Concern over Europe’s debt has eased but an upcoming election in Italy this month and a corruption scandal in Spain has rekindled concerns about their finances.

The major European indices – Britain’s FTSE 100, Germany’s DAX and the CAC-40 in France – all fell Monday. Milan’s main index suffered its biggest one-day decline since August.

The jitters ”highlighted what European leaders have been saying for the last few months – that they are not completely out of the woods,” said market strategist Evan Lucas at Australia’s IG Markets in a report.

In the United States, the three major indices suffered their biggest declines so far this year.

The Dow Jones industrial average closed down just under one per cent. The Standard & Poor’s 500 index fell 1.2 per cent while the Nasdaq composite index lost 1.5 per cent. That followed a surge Friday that pushed the Dow over 14,000 for the first time since 2007.

Benchmark oil for March delivery fell 17 cents to $96 per barrel in electronic trading on the New York Mercantile Exchange. The contract dropped $1.60 to close at $96.17 per barrel on the Nymex on Monday.

The yen has been falling over the past few weeks as the new government focuses on getting a moribund economy going again. As part of that drive it has asked the Bank of Japan to do more and that’s probably going to mean an expansion of the money supply.

In currency markets, the dollar fell to 92.34 yen from 92.38 yen late Monday in New York, while the euro fell to $1.3498 from $1.3520.

SC strikes Raja with lightning bolt

parvaiz-ashraf-6701

ISLAMABAD: The breaking news about the possible arrest of the prime minister on Tuesday proved that the Supreme Court and the prime minister’s office never let someone else hog the limelight for long in Islamabad.

An hour into Dr Tahirul Qadri’s much-awaited address came the earth-shattering news that the chief justice had ordered NAB to arrest the prime minister in the rental power projects (RPP) case.

The reaction was immediate and hysterical.

The second act of the conspiracy that had been launched with Qadri’s march had begun, claimed some. Those in favour of the SC argued it was a mere coincidence and that the court was innocent of all that it was being accused of.

The RPP case was heard by the SC earlier under which the deals had been cancelled; in March last year, the court had also ordered that NAB pursue the financial and criminal liabilities in these cases.

This meant that while the private companies had to be pursued to cough up money that they owed to the state exchequer, the government officials involved in approving these deals were to be charged and tried.

The names of the accused, which included Raja Pervez Ashraf in his role as the minister for water and power, had once earlier been placed on the ECL after the March verdict.

And then on Tuesday, in the midst of nail biting tension, came the latest apex bolt.

“We direct Additional Prosecutor General of NAB Rana Zahid Mehmood that he should undertake all the necessary steps during the course of day [italics added] and submit investigation reports to the concerned authorities and to get approved the challans/references against the accused persons and to cause their arrest… and put up report on Jan 17,” ordered the court headed by Chief Justice Iftikhar Muhammad Chaudhry.

SC-NAB friction

The orders did not come out of the blue. The tensions had been building for some time. Last week, a NAB official informed the court that he had suspended two investigating officers, Asghar Ali and Kamran Faisal, who had recommended to Director General of NAB Rawalpindi Col (retd) Subeh Sadiq that he should submit references against the accused in the two RPP cases to the NAB head office. Heeding their advice, Sadiq did so; he too was suspended.

However, the court was informed that these officials had been suspended because their performance or lack thereof was making the SC unhappy.

But it was the news of this suspension that made the SC unhappy; it did not like being made scapegoat for a decision that critics felt NAB had taken to slow down the progress in a case that could lead authorities to the Prime Minister’s House.

What added to its ire was Col (retd) Subeh Sadiq who informed the court on Tuesday that the authorities had blamed his suspension on the SC.

A visibly irritated bench ordered that NAB Chairman Admiral (retd) Fasih Bukhari appear before the court on Thursday and explain why he had falsely used the Supreme Court as pretext to remove the two investigating officers.

In its order, the court reminded the chairman that it had already issued a contempt notice against him for not complying with the March verdict in which the contracts signed between the governments and the RPPs had been rescinded.

The current case is about overseeing the RPP verdict and the proceedings are being held to supervise the progress in corruption references against the accused.

And it was in this regard that the court on Tuesday ordered that the NAB complete the investigation reports, get challans/references against the accused and then arrest them.

This paperwork has to be completed by NAB before the arrest of the prime minister will become a possibility.

The investigations and paperwork relate to two specific RPP cases which NAB has to pursue — the 150MW RPP contract given to
Techno Engineering Services (Pvt) Sahuwal, which caused a loss of Rs20.436 billion, and the Piran Ghaib Multan.

While the SC had been pushing for the investigations to be completed and the references to be filed, NAB was trying to argue that it had its own due process to complete which meant that it would hold an internal executive board meeting. The meeting,
NAB said, would decide whether or not to file the references now that the investigations had been completed.

The accused in the references are: Prime Minister Ashraf, former finance secretary Salman Siddique, former water and power secretary Shahid Rafi, Pepco’s former chairman Ismail Qureshi and managing directors Munawar Baseer Ahmad and Tahir Baharat Cheema, member power Fazal Ahmad Khan, chief executive officers of NPGCL (National Power Generation Company Limited) Mohammad Anwar Khan, Rafiq Butt and Ghulam Mustafa Tunio, chief engineer (CPP) thermal Qaiser Akram, Nepra chairman Khalid Saeed, chief executive of Techno Sahuwal Abid Ali, etc.

Hysteria is premature

None of the legal experts Dawn spoke to felt that there was any likelihood that the prime minister was going to be arrested anytime soon. They said the power to order the arrest was with NAB which had so far not ordered to do so.

Law Minister Farooq H. Naek said in an interview to a television channel that if the NAB chairman felt that the case was fit for the trial he would file it before a trial court (accountability court) which then had to issue orders for the arrest of any accused before the apex court could take up the matter.

“I think that being the apex court of the country the Supreme Court will never take any such decision that deprives the rights of any individual,” he added.

Advocate Chaudhry Faisal Hussain was also of the opinion that there was no arrest warrant against the prime minister and it was the prerogative of the investigating agency and the court concerned to see whether arrest was required or not.

However, senior counsel Waqar Rana said the prime minister could be arrested without the permission of National Assembly Speaker Dr Fehmida Mirza since the assembly was not in session. The court’s order, he said, was unqualified and, therefore, the
prime minister did not enjoy any immunity under Article 248(1) of the Constitution.

In a similar vein, Information Minister Qamar Zaman Kaira said in a TV channel that the government had not even received the SC order.

A spokesman for NAB said investigation into the case would be completed before a criminal liability was fixed. “The RPP investigation is continuing and on its completion, NAB will proceed to prosecute in the court irrespective of what position is held by individuals responsible for the scam,” he said, adding that it was not easy to fix criminal liability and NAB investigators might require more time.

Pakistan inches toward political uncertainty

KARACHI: Pakistan appeared to be treading toward an uncertain political terrain on Tuesday as arrest orders were issued for a sitting prime minister in a corruption case and a populist cleric called for the government’s resignation leading tens of thousands of protesters into the federal capital.

During the early hours of Tuesday, the Pakistani-Canadian chief of the Tehrik-i-Minhajul Quran (TMQ), Dr Tahirul Qadri, followed by a large motorcade and thousands of supporters on foot, called for the “corrupt” and “inefficient” sitting government to step down. He threatened that the people would otherwise “take matters into their own hands”.

“This president and prime minister…they are now ex-presidents and prime ministers. Their time is over. Dissolve the national and provincial assemblies by the morning. I am giving you until 11 am to step down or else the people will start making their own decisions,” said Qadri, who many believe to be backed by the country’s military establishment. “These millions of supporters have spoken. They have rejected your so-called mandate. You are no longer their representatives.”

The protesters — according to some estimates numbering between 25,000 to 50,000 — relocated towards D-chowk in front of the Parliament, where Qadri spoke to them again from behind a bullet-proof shield at around 1 pm, unveiling his charter of demands, and praising the country’s military and the judiciary. The cleric threatened to remain camped in front of the parliament along with his supporters until his demands were met.

Profile: Tahirul Qadri

“(The government) has wasted and brought a bad end to our armed forces, those armed forces who are highly sincere, highly competent and highly capable and highly professional,” News agency Reuters quoted Qadri, who alternated between Urdu and English in his speech. “Even they can’t do anything because the political government isn’t able to deliver anything from this land. Judgments are being passed by our great, independent judiciary but the government is not ready to implement them.”

But as Qadri praised the two state institutions, the Supreme Court of Pakistan announced orders for the arrest of 16 individuals, including Prime Minister Raja Pervez Ashraf, in the rental power projects case.

Prime Minister Ashraf was accused of receiving kickbacks and commissions in the RPPs case during his previous stint as federal minister for water and power.

“The chief justice ordered that all concerned, regardless of their rank, who have been booked in the case be arrested and if someone leaves the country, then chairman of National Accountability Bureau will be held responsible along with his investigating team,” said Aamir Abbas, lawyer for the National Accountability Bureau (NAB). “The sixteen include Raja Ashraf.”

Profile: Prime Minister Raja Pervez Ashraf

Nearly an hour later, Fawad Chaudhry, an aide to the embattled prime minister, accused the military and the Supreme Court of conspiring together to topple the government.

The uncertainty also took its toll on the country’s equity markets, with the benchmark Karachi Stock Exchange 100 index plummeting 3.16 per cent during the days trading, closing 525 points lower at 16,107.89.

The ruling coalition government battles its latest challenges just a day after Prime Minister Ashraf invoked Article 234 of the Constitution, dissolving the provincial government and imposing governor’s rule in the restive Balochistan province. The government was forced to give in to hundreds of protesting ethnic Shia Hazaras who had been refusing to bury the victims of bombings in Quetta, the provincial capital, to protect government inaction over attacks targeting the community.