So that is a better hacking strategy than ddos'ing mt. Gox. Clearly if you can make the DOW drop 127 pts on demand you can figure out a way to profit handsomely from that. The simplest being to short a basket of stocks that are going to be affected and cover the shorts with buy orders. Harder to track than a 'one stock shock' as they say since by their nature DOW stocks are heavily traded and people are guessing all the time if they are going to go up and down. Spread $15 - $20M in shorts across the basket, cover them on a 15% net gain in proceeds and then shoot the canary.
1) Forget execution and settlement risk, assuming you can get away with it, can you really make enough to make it worth your while.
You only get one shot at this, how many times can you anonymously crater the market?, and if you get caught you'll never trade again so you need to make retirement levels of money on this one "trade".
2) Execution risk. Assuming you've got your short butterfly setup so that no one will know you now need to unwind your trade in a matter of milliseconds while making it look like you are reacting, rather than knowing this event was coming.
Part of this is that like you said you'd do this over a basket of stocks. Looking at a butterfly option layout in wikipedia it seems pretty simple. Trying to get out of 30 or so of these trades in under 100 milliseconds isn't.
3) Settlement risk...
You'd' be trading across multiple exchanges all with different timings and liquidity. There is a good chance that your trade gets busted by some but not all exchanges which means you go partial fills all over the place and you might end up partially short and long when all the accounting is done:(
You don't need to make "retirement levels of money" on one trade, because if you're caught, you'll be paying it all back and spend your retirement in jail.
In fact, isn't it fairly safe to assume that the SEC will spend a good deal of resources looking into any unusual trading patterns around this dip?
I know of at least 5 firms who would have the means to make a big profit in a rather stealth way and all of the infrastructure needed to minimize execution risk (to the point that it may be negligible)... Just because you cannot do it or that it is hard for you, do not assume it cannot be done or that it is (as) hard for everybody...
I do to, and all 5 of them make more money as part of the regular operation of the markets than they would as part of some Jerry Bruckheimer movie plot.
You don't need to time it, do you? If you have resting buy orders the market is going to come down and hit you at a favorable (to you) price. You can close the position when the market rebounds.
> You don't need to time it, do you? If you have resting buy orders the market is going to come down and hit you at a favorable (to you) price. You can close the position when the market rebounds.
You are, of course, right if you know how far down the bottom is and that the market will rebound.
Maybe I'm just a coward, but all I see is risk:)
Here are the big questions to ask yourself before trying this.
What if the market doesn't rebound, ie if you set your buy at a 1% drop and it drops 3% and then closes down 2.5%. That's enough to shut down alot of prop shops:)
What if it doesn't drop low enough to hit your bid, ie the market just ignores your buy and shoots way up. Then your short position crushes you.
Or if you use a short butterfly, what if the market just yawns, you've lost your one chance at moving the market but atleast you live to trade another day:)
Trading that looks like foreknowledge of the release of fake news would stand out, but purchased based on knowledge that the news was fake would blend in with trades by plenty of other people who simply figured it out quickly.
Someone(s) also lost a LOT of money today. Given 2 scenarios:
A) A script kiddie had fun with a tweet just for the lolz and it had a short term unintended impact on the Dow.
B) There is a nefarious plot by folks who have the no how and infrastructure to pull off a highly risky, illegal trade who couldn't make more money just doing what they normally do.
Try FBI and Secret Service, along with 10 other agencies. Perhaps even US Cyber Command could get involved. If this is a trading strategy, its a really really dumb move.
Yeah, how often do prosecutions actually occur? The market is huge and trades can easily get lost in the noise. Was anyone arrested for trading prior to 9/11?
The only way to figure out who was making trades on the expectation of this hoax would be to find the hacker, which probably means finding who controlled a botnet, which probably means convincing Russia to extradite someone. Good luck.
Which is a lot, but it's also what you could have gained just from being in the market this morning, or if you bought at yesterday's low and sold near close.
Leverage is tricky though. Derivatives markets are orders of magnitude smaller than the stock market so setting up a big trade there would probably be as/nearly as visible as setting up a gigantic short on DOW stocks.
Yes, but due to their structure perhaps, these ETFs generally seem only to go down day-to-day according to their graphs. You would have had to have bought them right before and sold at the bottom - otherwise you wouldn't make much, since you slowly lose money on these ETFs over time. Also, such a trade combo would probably appear to an investigator to indicate questionable fore-knowledge on your part.
if you bought call options beforehand on the volatility index VIX ( https://www.google.com/finance?q=INDEXCBOE%3AVIX or rather VXX, which are futures on the volatility index) you could have profited a lot indeed. take a look at this chart: http://i.imgur.com/XQfWra4.png with good timing you could've made a return of 1300%, using only call options on VIX futures.
"The simplest being to short a basket of stocks that are going to be affected and cover the shorts with buy orders."
Don't even worry about the basket thing. You would just use SPY (S&P 500 ETF) or ES (e-mini S&P futures). If you can predict how far it will drop ahead of time (a big if) then the strategy is, as you have said, to leave resting buy orders at the bottom of the dip. You don't need to short though, you could just unwind when the position when market bounces back.
Yet another reason why Twitter needs two-factor authentication.
The tweet, which said that there had been two explosions at the
White House and President Barack Obama was injured, came
after hackers made repeated attempts to steal the passwords of
AP journalists.
If people with large pockets are dedicated enough to monitor Twitter, it must probably have proven efficient enough to justify doing it. I don't expect them to stop doing so until the fake tweets situation goes very big. And I'm sure Twitter will react with stronger authentication before it gets that bad.
So called "two-factor" authentication on the internet pretty much means entering two different passwords. I've never seen anyone attempt anything more complicated than making people remember what ultimately amounts to yet another password. Certainly not on a free website.
But even financial websites pretty much provide a dumb questionnaire list with challenges like "what was your first dog's favorite color?" to which you can choose any kind of text string as a response ("bark" for example).
Does anyone honestly believe that these things provide additional security? It's like the TSA frisky-crotch-grope of authentication.
> Does anyone honestly believe that these [two-factor auth] things provide additional security? It's like the TSA frisky-crotch-grope of authentication.
Yes. Especially as time-based passwords, a-la an RSA token or Google's two-factor auth, since they require something you know (your password) and something you have (the token). They expire and regenerate every minute or so, can't really be remembered or predicted, require access to a physical device that displays the password, and near impossible to predict without information about the seed.
I personally don't care about it all that much, since I hold about zero affluence and clout on Twitter, but it's a stupid hassle to stay on top of for celebrities and the people managing brands and politicians.
I am a security zealot, and even I can't be bothered to have unique passwords on some - unimportant - websites.
It is so easy to set up for a user, and I might as well just have it, if it means all my sites are represented in Google's TFA app on my phone. It's no hassle to use at all, as long as the sessions last for a few weeks.
It's not just two different passwords, it's one password that you know and another password sent to some physical device (usually a mobile) that you must be in possession of
What you're describing is not two-factor auth, it's more like a recovery question.
Two-factor auth involves entering a temporary code along with your password. The temporary code comes via SMS or a special mobile phone app. Google, Facebook, and Dropbox are examples of free websites that offer this.
I think that any journalists that retweeted this should be unequivocally fired. After all the jumping to conclusions the news outlets did last week about the boston bombers and the subsequent apologizing for accusing innocent people, there's really no excuse for this.
Good lord, fired? For re-tweeting an AP tweet? You may want to do independent verfication, but hell, it's the AP. It's not like somebody set up an a AD account and tweeted it as a fake AP. I don't blame anybody for re-tweeting that.
What is with people and wanting people's jobs over every little thing these days? In the land of Twitter and Facebook, you're not allowed to make an occasional honest mistake any more.
An honest mistake is misspelling someones name. Retweeting that the President of the United States has been injured without taking 10 seconds to establish the veracity of story is just inexcusable and lazy journalism which could someday get people hurt.
Oh, get over yourself. If they re-tweeted it immediately, then went to get more info on it, found out that it was false, and then apologized/deleted it, who cares? It came from a particularly reputable source, so simply clicking one "re-tweet" button does not a fire-able offense make.
I'm glad to know that you've never made an assumption based on authority, a minor mistake, or even taken a shortcut in your career, though.
Calm down friend. I'm merely stating that my belief that as journalist, one is in a trusted position of power to disseminate news to the masses and with that power (excuse the cliche) comes responsibility. Blindly retweeting sensationalist things without fact checking is no better than shouting "Fire!" in a crowded building.
It's an "honest mistake" only because we've accepted that "breathless-by-the-second-breaking trumps truthful" is an acceptable standard for news. The journos that hit "retweet" presumably did it because they felt their followers would appreciate the elite-ness of knowing 15 seconds earlier than their less-in-the-know friends.
IMO, there is not even theoretical public utility in immediately sharing a rumour, no matter how juicy, rather than confirming it and breaking it 10 minutes later. If you must, share it with a fat disclaimer that you're currently confirming it.
Maybe it's the Silicon Valley mindset where everyone switches jobs every six months anyway (as companies go bust et al) so being fired is basically a slap on the wrist, career-wise.
To be fair, that was his first day and he was needlessly swearing trying to pronounce the guy's name right after not checking to see if they were live, and then completely fumbled once his co-anchor turned it over to him. I think it was completely reasonable for them to fire him over that - no one would have taken him seriously afterwards. Also, if you look at his actual written news reports on that network's site, they were littered with misspellings and grammatical errors, and the background on his official Twitter has vulgar statements that just don't line up with the profile picture of him in a suit. He's all-around unprofessional and that might have been the icing on the cake.
I believe owners of many news outlets would prefer an occasional goof-up like re-tweeting a false story, rather than missing out, even for a few minutes, on a very big story.
It appears to me that there is a very high cost for news outlets to be late on big stories. So no doubt journalists don't "waste" time in verifying facts.
Would be interesting to know how much of this reaction came from people reacting, and how much from the High Frequency apps reacting to the people reacting. I don't know if they have any way of figuring that out, but it would be interesting to learn.
I am writing a tool to scrape social media and do sentiment analysis on that to provide a signal to make stock recommendations. I plan to feed it into an actual trading system at some point.
So the tweet would be integrated into the system, as would any reporting of it. :-/
How would having twitter integrated into your trading system help you in this instance?
My suspicion is that by the time other people start re-tweeting this the and you can get any sort of twitter sentiment determination the market will have corrected.
Are you taking the other side of this and hypothesizing that you can determine twitter sentiment before the market reacts? If so please mail me, I write in house trading systems for a living and I'd love to chat.
> How would having twitter integrated into your trading system help you in this instance?
(1) In this instance, I'm pretty sure I don't know how to solve the problem naively. It went onto a theoretically legit account. I would have to cross-correlate with a couple other sources of information. At any rate, it points out to me that I need to encode a 'reliability' measure of the information.
(2) Not really. I don't have the capital to operate at low-latency levels. My hypothesis is the obvious one: markets are emotional and I should be able to construct a predictor for certain industries based on emotions emitted on accounts & news snippets relating to those industries.
I'm a finance guy who has been reading about NLP and sentiment analysis. Any introductory books on this subject that you'd recommend for a non-linguist interested in NLP and sentiment analysis? I'm well versed in python/R.
Sorry, I don't have any help, I'm just a regular joe looking at this stuff and taking particularly hacky ways to get the job done on the side (when I don't have other things going on. :-) ). The approach I've been taking initially is the bag-of-words approach. Looking forward I anticipate using some sort of ngram-based approach which clusters sentiment around phrases. These are stupid approaches, but I want to see how far I can push simple and stupid. ;)
I expect some HF apps got killed, while other HF apps got paid. Events like this and the 'flash crash' make it look like HFT is a good thing, or at least harmless. The market is durable against people doing silly things, and rewards those who do sensible things in response.
Are these so called high frequency trading algorithms being fed Twitter/Soc Med information?
Not sure if pure human intervention could cause such a large drop in so short a time period.
In which case, hacking multiple relatively smaller information sources, rather than larger govt. or banking sites could provide very high upsides with much lower risks.
That is my hunch as well. HFT algorithms do exist which trade primarily on news feeds, and given the relative ease of harvesting Twitter data, there has to be more than just a few HFT bots that reacted to this.
There are automatic trading strategies that trade based on news events. Opinions on them are pretty mixed as none of the published ones show consistent returns above luck levels.
What is more likely is that human traders reacted to the tweet and caused microstructure changes that were amplified by algorithmic trading activity causing the rapid sell off. But then on the flip side those same algorithmic trades brought the price back to it's correct level just as quickly.
This is essentially a no harm/no foul event where the only people impacted are the game players.
Yep, that becomes the huge problem with automatic trading programs. Our financial system is becoming a joke that can easily be gamed. This type of thing will continue to happen!
It was a pretty big deal. I ran some queries against some intraday data of a proprietary market index (kind of a cross between the S&P 500 and Russell 2000) and it was the biggest one minute drop (at -0.56%) that I found within the past year.
For comparison, here are the top 5 that I found since 4/23/12:
I agree that it's a big deal. But I think a lot of people are reacting to the images of the graphs, not to the actual numbers that the graphs represent.
If you could repeat that trick it would be a bit like a combustion engine. Every individual explosion doesn't amount to much in terms of force but a long sequence will get your car up to speed quite nicely.
Interesting to think that having access to the twitter account for a major news source is like having a "big red button". I wonder if people won't be trying harder to gain access to things like this from this point forward.
How is investing in stocks not a glorified form of gambling?
When you buy a stock, and it goes down in price a few months later, the experts tell you to buy more of it as it goes down, because it'll probably go up in the future.
When you gamble $5 on a blackjack hand, Martingale experts will tell you to gamble $10 on the next hand, and then $20 on the next hand again if you lose the $10 hand.
Not sure if serious. Investing long in e.g. the DJIA isn't gambling by any stretch of the imagination.
That's not to say there aren't plenty of other transactions that may blur the line a little more. Hell, entire options markets exist to make a commodity out of risk.
The perpetrators would have had to have short the entire Dow to make a profit on this piece of news as it did not focus on any particular stock or sector.
And they would have needed to exit really fast to make their bundle.
It could have been an HF app designed to act purely on this kind of situation though
Instead of shorting high, they could have just bought a bunch of index funds right in the trough. When "everything" goes down, "everything" is going to go back up.
Conveniently, you wouldn't have to hold any positions in advance, so you'd appear to just be a player who figured out the non-veracity of the news quickly and took advantage of it to beat the market. You'd also not have to sell right away--you could hold onto the positions indefinitely, if you liked. The only problem is predicting the exact inflection point of the drop (i.e. the best time to place the buy order)--but I have a feeling people might be "predictably irrational" in this, and fake-news stories about easy-to-verify facts might have a regular/well-known half-life. This is classic "insider trading", just applied to a whole market instead of an individual stock.
The only advantage of shorting in this case, I think, is if you didn't have the capital to actually make the money you wanted--you could do the shorts naked.
Yes but shorting the entire market isn't difficult at all. And buying and selling a position in a matter of minutes also isn't difficult in modern times.
It's the modern equities market -- lightning fast, and not to the benefit of market stability or the average investor.
Agree.
But was trying to understand if an individual hacker was behind this or an actual big financial organisation.
I was of the opinion that an individual hacker would still be classified as an average investor. He/she might not have had the tools to benefit from the end result. not sure
A big organisation, on the other hand, would be much better placed to exit a position based on custom algos and deeper integration into the markets to buy and sell positions.
In what possible way did this impact the "average investor" (whoever that is)?
It seems to show a pretty stable market to me. Think of it this way, what would have happened before electronic trading if a fabricated wire release had made it into newspapers? It would have taken weeks to sort out and "average investors" would definitely taken a hit.
> In what possible way did this impact the "average investor" (whoever that is)?
The average investor, of which there are millions, can't react quickly to market changes. They're in a mutual fund or another similar investment that moves glacially if at all to market changes, and that's generally a good thing (on the premise that buy & hold is a good thing).
So there really is an average investor. And he really can't exploit fast market changes.
> It seems to show a pretty stable market to me.
Yes, but if this scenario is true, it represents an exploitation of a weakness in market information (some people have information that others don't), so it's an undermining of the premise of an efficient market.
Mutual fund and etf investors would have only been impacted by this event if they tried to liquidate at the precise time today that the market had this aberration. That is a vanishingly small % of people. For every other average investor they wouldn't have even noticed this by looking at their portfolio. They shouldn't be paying attention to daily swings in the dow anyway, more or less minute by minute ones.
I'm not sure what "scenario" you are talking about but the linked wsj article mentions that people reacted to a public tweet and just as quickly corrected itself after public statements from the white house. No insider information has been proven to be part of that.
The rampant and irresponsible speculation about this being some big short sell plot on this forum doesn't mean that the market behaved incorrectly. In fact, in reality it behaved exactly correctly. As soon as the hoax was uncovered the dow returned to it's correct level. Showing stability.
> The rampant and irresponsible speculation about this being some big short sell plot ...
No one said that. I said it could be used that way, not that is was.
> doesn't mean that the market behaved incorrectly.
Any time someone exploits knowledge that isn't public, it's an exploitation of a market weakness. If someone takes a position in a stock with the intent of bad-mouthing its competitors or releasing false information, he's exploiting a market weakness.
Some exploitations of private knowledge are merely bad behavior, and some, like insider trading, are illegal. All of them represent weaknesses in the market because all investors don't have the same chance to benefit.
> In fact, in reality it behaved exactly correctly. As soon as the hoax was uncovered the dow returned to it's correct level.
By your reasoning, pump & dump proves that the efficient market hypothesis is at work in the market. I don't think so. It only proves that some investors can game other investors.
Taken to its extreme, if someone was able to game the market consistently like this, day in and day out, businesses would recognize that they were being cheated and would refuse to raise capital using equities. This is why the SEC is so aggressive about locating and punishing examples of this class of behavior.
> Showing stability.
By that reasoning, if we have the same number of bank robberies on Wednesday as on Monday, we've proven that things are stable.
But where was the non-public information? Where was the gaming? Without proof of those things all speculation about insider information is moot. Pump-and-dump's are specific types of gaming the system. There is no proof this was that.
The only thing we know is that a news source incorrectly reported bad news. The market responded to that bad news in the way we would expect and then when it was obvious that it was a hoax corrected itself. That is a stable system.
It would have been proof of an instable system if either A) the market moved for some incomprehensible way or B) did not correct for obviously bad behavior.
The market took all public information into account and corrected itself quickly. Precisely as we would expect in an efficient market.
The fact that the Tweet's content was false was non-public information for a short time, just long enough to see the market begin a plunge. Obviously whoever posted the false Tweet knew it was false, and they could have exploited that fact (not to say anyone actually did this), while other people were reacting to it as though it were true.
> Where was the gaming?
See above, and use your head. A pump and dump always pivots on the fact that the perpetrator knows what he's saying is false.
> Without proof of those things all speculation about insider information is moot.
Feel free to change the subject. We have already established that this is a hypothetical discussion.
> It would have been proof of an instable system if either A) the market moved for some incomprehensible way or B) did not correct for obviously bad behavior.
What does stability have to do with it? The topic is exploitation of predictable market moves, not unpredictable ones. Obviously a hacker could (in principle) anticipate, and act on, a coming market drop on news of an attack on the White House.
> Precisely as we would expect in an efficient market.
According your thesis, insider trading is impossible because the market will magically adjust to differences in information. If this were true, the SEC wouldn't care about insider trading. The fact that the SEC does care, demonstrates that your position is wrong, and that the market can be gamed.
A market cannot be efficient unless everyone has access to the same information. This is how the efficient market hypothesis is defined. And again, the SEC does what it can to assure that people can't exploit non-public information. The reason? It undermines confidence in the market's fairness and would ultimately cause businesses to avoid equities as a funding source.
That is far and away the most pedantic form of the efficient market hypothesis I've ever heard. No one in academia or the industry actually believes that everyone always has access to the exact same information at the exact same time.
A hedge fund manager who has decided to unload a huge position but has not acted on it yet would cause your definition of the hypothesis to no longer hold. This was never the intent and if it were it could only exist in some perverted Platonic cave of a market.
In the real world, this showed a very efficient market. 2 pieces of public information were consumed nearly as fast as they could be produced and the correct prices in the market were reflected. This is what the real application of an efficient market would look like.
As far as what does stability have to do with it, your central premise was that the modern equities market was not stable and was not to the benefit of an "average investor". None of this was proven by today's event and was in fact largely disproven. Stability was not jeopardized and the average investor was not impacted by what could have been a malicious attempt to game the system or could have been a juvenile prank, either way it largely didn't matter.
> That is far and away the most pedantic form of the efficient market hypothesis I've ever heard. No one in academia or the industry actually believes that everyone always has access to the exact same information at the exact same time.
Are you trolling? The efficient market hypothesis is a hypothesis, and it's based on the premise that everyone has the same information. Which word didn't you understand?
No one knows whether the EMH is either valid or that it in any way underlies the behavior of the real market. It's ... wait for it ... a hypothesis.
Quote: "In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made."
After reading the above, has it escaped your attention that the EMH, as defined, assumes that everyone has the same information? Common knowledge is a working hypothesis, just like the EMH itself.
> ... your central premise was that the modern equities market was not stable and was not to the benefit of an "average investor".
Only when private information informs trades, and I made this perfectly clear. This is why the SEC rigorously prosecutes inside traders, because it's true -- when private information informs trades, the market isn't fair.
> None of this was proven by today's event and was in fact largely disproven.
Nonsense. The market fell based on a lie -- on private information. This proves that information must be both shared and public for the market to work as it should.
> Stability was not jeopardized ...
The market commenced to plummet based on false information. The only reason it didn't melt down entirely is because those who knew it was a lie, very quickly said so. Exactly which part of that fact do you find to be mysterious?
> 2 pieces of public information were consumed nearly as fast as they could be produced and the correct prices in the market were reflected.
Nonsense, and you are trolling. Your position is that the lie about an attack caused the market to react appropriately. But the market's move was based on false information, therefore it was not a "correct price" -- someone was gaming the system, and whether or not it was for private gain is irrelevant.
> ... and the average investor was not impacted by what could have been a malicious attempt to game the system ...
False. average investors, and all straight players, and "impacted" by insider trading -- it represents a threat to public confidence in the market. That's why the SEC prosecutes inside traders, throws them in jail.
Exactly which part of this everyday reality is causing you the most confusion?
The market can be manipulated by inside traders and people who put out misleading or false information for private gain. The SEC does all it can to address this very real threat to public confidence in the essential fairness of the market.
Circle the world you you don't understand and raise your hand.
Whether or not the US equities market generally or the Dow Jones Index stocks specifically are an efficient market is a topic best left for another forum. That said, your entire argument seems to miss a central tenant of the EMH in any of its forms. That is, that there is no LONG TERM informational advantage in the markets.
There is no mention in any of the forms of the EMH that I know of, that short term information asymmetry cannot be used for short term gain. Only that information asymmetry is unsustainable in an efficient market. If anyone had proposed otherwise they would be laughed out of the trading floor.
Further, no one claimed that market confidence isn't eroded by insider trading, only that market confidence should not, and will not be eroded by the events of today. An oddity, that corrected itself and left the vast majority of portfolios un-impacted.
Further, I posit that the fact that the market corrected itself without outside intervention, no circuit breakers, no governmental control, should be seen as a sign of stability, not as a sign of weakness. If you are a long term investor, nothing that happened today should concern you, rather you should be happy that hackers pulling pranks cannot impact your portfolio for more than minutes.
