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Twitter has a direct impact on the markets: There are news services that are dedicated to delivering important information that could affect markets as quickly

Twitter has a direct impact on the markets: There are news services that are dedicated to delivering important information that could affect markets as quickly as possible. I heard the news from one of these services directly before the market seriously dropped. The important question is why the markets reacted the way they did. There seems to be a sentiment that these sorts of moves are catastrophic and avoidable, but the reality is that these are movements reacting to real information from the environment that will affect the future state of economics. When bad news develops, more efficient markets drop faster in anticipation for this current or future event. This means that the information, or the bad event, has been diffused among the population. With the AP situation, the news of such an extreme terrorist act would surely cause unbalance throughout Western economies; disrupting peace, supply chains, and many companies. This would have a direct impact on equities like the DOW. Within two minutes of the fake tweet, it was reported as being fake and the markets rebounded. In fact, I would guess that the majority of people hurt by this volatility spike were market making or algorithmic traders. They either were directly linked to twitter text feeds, selling on the way down and buying at the top of the retracement; or dump positions put on earlier in the morning. Of course, if the event happened, these traders would have been the winners. The problem with this current situation is that the high-speed news delivery services spread this fake tweet without any verification (except trust that the AP feed is trust-worthy), and people with direct access to these services were most likely individuals with access to trading accounts, allowing them to drop a variety of assets, most notable the DOW or S&P.

minimax 14y ago
"In fact, I would guess that the majority of people hurt by this volatility spike were market making or algorithmic traders." I think it's the other way around. I guess it depends on the volume on either leg of the spike, but the market makers who were buying on the way down would have been accumulating inventory at reduced prices and could have made a tidy profit when things bounced back. On the other hand, any trader with a stop loss order within the range of the spike probably got hurt by being forced into selling at a reduced price.
- washedup 14y ago
  Yea, good point, it all depends on where the volume was. I would break it up this way: The initial sell off: These orders would be executed from traders that use a live twitter feed to make buying or selling decisions. The underlying algorithm would have been able to execute these orders faster than any human. The serious news would have driven them to sell quickly, causing the market to start diving. Most of these probably made money, depending on how they were able to react to the news that it was fake. It is possible that there were algorithms selling all the way down the entire spike with the expectation that it was going to go down even further, losing money on most of the positions during the bounce. After-all, the bounce was faster than the drop. Secondary sell off: While the algorithms are executing sell orders, market makers would begin to realize that a huge volatility spike was entering the market place, whether they heard the bad news or not. Because market makers train their models on relatively low volatile intra-day data, this spike would have been enough to reach either max positions or max downdraw, forcing the traders (or the market making algos they created) to cover positions for a loss on the way down.
- yummyfajitas 14y ago
  ...but the market makers who were buying on the way down would have been accumulating inventory at reduced prices and could have made a tidy profit when things bounced back. On the other hand, any trader with a stop loss order... So your claim is that market makers who were promoting an orderly market (by pushing the price back up) made money, while speculators who contributed to the problem (by pushing the price down) lost money? Sounds like the market is at least getting the incentives right.
jacquesm 14y ago
> the news of such an extreme terrorist act would surely cause unbalance throughout Western economies; disrupting peace, supply chains, and many companies. And that, in a nutshell is the whole problem. We should not react to such news at all, it would solve the terrorist problem and the economic issues in one go.
- fixxer 14y ago
  > We should not react to such news at all, it would solve the terrorist problem and the economic issues in one go. That isn't how markets work and, more importantly, if you were to institute some policy that forced them to work that way, you'd get less liquidity. In my opinion, these shocks are a sign that the market is actually working properly. As an aside, I know a lot of people who faded the move (remember, you have a choice!) and made quite a bit of money (smallest number I heard was $50k).

minimax 14y ago

"In fact, I would guess that the majority of people hurt by this volatility spike were market making or algorithmic traders." I think it's the other way around. I guess it depends on the volume on either leg of the spike, but the market makers who were buying on the way down would have been accumulating inventory at reduced prices and could have made a tidy profit when things bounced back. On the other hand, any trader with a stop loss order within the range of the spike probably got hurt by being forced into selling at a reduced price.

washedup 14y ago
Yea, good point, it all depends on where the volume was. I would break it up this way: The initial sell off: These orders would be executed from traders that use a live twitter feed to make buying or selling decisions. The underlying algorithm would have been able to execute these orders faster than any human. The serious news would have driven them to sell quickly, causing the market to start diving. Most of these probably made money, depending on how they were able to react to the news that it was fake. It is possible that there were algorithms selling all the way down the entire spike with the expectation that it was going to go down even further, losing money on most of the positions during the bounce. After-all, the bounce was faster than the drop. Secondary sell off: While the algorithms are executing sell orders, market makers would begin to realize that a huge volatility spike was entering the market place, whether they heard the bad news or not. Because market makers train their models on relatively low volatile intra-day data, this spike would have been enough to reach either max positions or max downdraw, forcing the traders (or the market making algos they created) to cover positions for a loss on the way down.
yummyfajitas 14y ago
...but the market makers who were buying on the way down would have been accumulating inventory at reduced prices and could have made a tidy profit when things bounced back. On the other hand, any trader with a stop loss order... So your claim is that market makers who were promoting an orderly market (by pushing the price back up) made money, while speculators who contributed to the problem (by pushing the price down) lost money? Sounds like the market is at least getting the incentives right.

jacquesm 14y ago

> the news of such an extreme terrorist act would surely cause unbalance throughout Western economies; disrupting peace, supply chains, and many companies. And that, in a nutshell is the whole problem. We should not react to such news at all, it would solve the terrorist problem and the economic issues in one go.

fixxer 14y ago
> We should not react to such news at all, it would solve the terrorist problem and the economic issues in one go. That isn't how markets work and, more importantly, if you were to institute some policy that forced them to work that way, you'd get less liquidity. In my opinion, these shocks are a sign that the market is actually working properly. As an aside, I know a lot of people who faded the move (remember, you have a choice!) and made quite a bit of money (smallest number I heard was $50k).