"Breaking," read the news from the Associated Press. "Two explosions in the White House and Barack Obama is injured." Posted on the AP's official Twitter feed at 1.07.50pm eastern time on Tuesday, the effect was instant. Share prices for some of the world's biggest companies nosedived: the Dow Jones plunged from around 14,700 points to 14,554 in just over two minutes and billions of dollars were lost. Perhaps the only thing that stopped markets dropping further was that liquidity dried up, so that traders who wanted to sell couldn't. Then, at around 1.10pm, denials began to appear – AP's Twitter feed had been hacked and the story was false. Stocks rapidly recovered the ground they'd lost a couple of minutes before.
Welcome to the era of the "flash crash", as it's been dubbed. However wrenching the events described above, they are by no means a one-off. In May 2010, the Dow lost 1,000 points in a few minutes before heading north again. The difference this week is that an event kicked things off – the hoax news of White House explosions. This raises two discrete issues.
The first is to do with social media and its effect on markets. Since it was created in 2006, Twitter has become an essential secondary newsfeed on many trading floors, the website many check for detail and disparate analysis of reports and events – or just to gauge what others are talking about. Financiers' hunger for information is nothing new, of course: legend has it that Nathan Rothschild knew the result of the Battle of Waterloo 24 hours before the London government and was able to use his knowledge to speculate in government bonds and make a fortune. But this week has underlined how the democratisation of information has also heightened the risk of misinformation. When newswires broke news in a relatively secure fashion to high-paying subscribers, hackers found it far harder to commandeer the wires and spread lies. Today that is a real threat.
The second issue is the speed and scale with which such errors can be amplified – not just by the sharing of news on the internet but also by high-frequency trading. Using algorithms, dealing-room computers conduct hundreds of thousands of automatic trades within seconds. These can sometimes steady or smooth markets, as when algorithms correct an error made by a fat-fingered human. But other times they can make things worse, by exacerbating a dramatic move in asset prices. This is an under-researched area. Yet, as the Bank of England's Andy Haldane has warned, it could prove extremely significant the next time there's a big crash. As Mr Haldane remarked in a 2011 speech, today's flash crash might be tomorrow's "space shuttle disaster".
