Hiroko Masuike/The New York Times
Bart Chilton of the trading commission, which plans to discuss the effect of social media on markets.
That is the question the financial industry and government regulators are trying to answer after a Twitter hoax on Tuesday that claimed President Obama was injured in an explosion at the White House. That report caused the Dow Jones industrial average to drop temporarily by 150 points, erasing $136 billion in market value.
The markets recovered in minutes, but the episode has heightened concern among regulators about the combination of social media and high-frequency trading.
The vulnerability, in part, stems from the Securities and Exchange Commission’s decision this month to let companies and executives use social media sites like Twitter and Facebook to broadcast market-moving news.
High-frequency trading systems are designed to make trades based on keywords within milliseconds. The hoax message also went out on a new feature on Bloomberg’s financial data terminals that delivers select Twitter posts to hedge funds, investment banks and other users.
On Tuesday, the Commodity Futures Trading Commission plans to hold a public meeting in Washington with a couple of dozen high-frequency traders to discuss whether there should be additional safeguards to protect against the effects of social media on markets.
Even as markets rebounded on Tuesday, some investors lost money on the quick decline while others made money if they bet on a sharp drop.
“In 2010, we passed Dodd-Frank, the big financial reform bill, but nowhere in there do they mention high-speed trading or technology,” said Bart Chilton, a member of the trading commission. “That’s how quickly markets are morphing. Now, here we are three years later, woefully unprepared.”
The false report (“Breaking: Two Explosions in the White House and Barack Obama is injured”) was posted on Tuesday after Syrian hackers broke into The Associated Press’s Twitter feed.
Immediately, the mood shifted on the floor of the New York Stock Exchange.
“It was nine, 10, 11 seconds and it was fast and then the question was ‘Why’?” said Andrew Frankel, co-president of the brokerage firm Stuart Frankel & Company.
He said traders realized shortly after that the post was a hoax since the television screens showing Bloomberg and CNBC had nothing about an explosion at the White House. Still, the episode recalled the 2010 “flash crash,” when an automated trading program caused the Dow to sink more than 600 points, and it left a deep skepticism of social media on the trading floor.
“You look at how quickly that happened and now everyone wants to release corporate earnings on Twitter,” Mr. Frankel said, in between calling out, “Sell!” to his team. He added: “The concern is ‘How do you know what’s right and what’s not? How do you know what’s hacked and what isn’t?’ ”
Spokesmen for Twitter and The A.P. declined to comment.
Even though Syrian hackers remain the prime suspects, the trading commission is now investigating 28 different futures contracts and specifically examining the five-minute period before and after The A.P.’s Twitter account was hacked. It is looking to see if there were anomalous trades, and investors who benefited from them.
“To think it was all lost because of this hack attack is very disconcerting,” Mr. Chilton of the commission said. “We would be irresponsible if we turned a blind eye to these debacles.”
The decision to allow market information on social media came after Reed Hastings, chief executive of Netflix, had posted on Facebook that the service had exceeded one billion hours of streamed video a month, sending its stock price up.
“We appreciate the value and prevalence of social media channels in contemporary market communications, and the commission supports companies seeking new ways to communicate,” the S.E.C. said on April 2.
Two days later, Bloomberg introduced a feature on its financial data terminals that incorporates a stream of relevant Twitter posts delivered to investors. All of Bloomberg’s more than 310,000 subscribers, who pay at least $20,000 a year for access to the terminals, now have access to those posts, which the company says are clearly identified as Twitter messages.
“The S.E.C.’s decision reflects the reality that we were dealing with in that this information is being distributed by companies and investors are consuming it and we needed to get it on the terminal,” said Brian Rooney, the company’s core product manager for news, adding, “We’re not in a world where people live in a vacuum.”
At the same time, the use of algorithms designed to peruse millions of sources of information like blogs and social media to analyze and execute trades is only becoming more widespread.
“The macro trend of finding patterns in words is something that will be used more and more,” said Paul Rowady, a senior analyst at Tabb Group, a capital markets research and consulting firm.
The incorporation of social media in these algorithms is relatively new and is therefore particularly susceptible to hacking.
“A Twitter feed is structured in a way that is machine-readable, and there’s a broad following so you get strong signals about topics,” Mr. Rowady said.
Hedge funds, investors and Wall Street banks are hiring companies to sift through the hoards of social media messages. DataSift, a company that filters real-time content on social media, started in 2011 and now has more than 20 financial services clients, including Bloomberg L.P.
DataSift’s computer programs siphon through posts to deliver only relevant information in two to three milliseconds.
“There’s a massive tidal wave of data we can clean up and process and deliver out back to clients,” said Rob Bailey, the company’s chief executive.
The A.P.’s account was the sixth prominent Twitter account to be hacked in recent months. Accounts for CBS, NPR and BBC were all hacked by the Syrian Electronic Army, a group based in Syria, which has been attacking the accounts of Western news outlets in retaliation for what it says is one-sided coverage of the Syrian civil war.
The attack on The A.P.’s Twitter account meant that its nearly two million followers quickly disseminated the false report. Security experts who have been tracking the Syrian Electronic Army now fear that the group has been emboldened.
“It wouldn’t be surprising, given the impact of this attack, for the S.E.A. to try this attack again,” said John Scott-Railton, a research fellow at the Citizen Lab, an organization at the University of Toronto that focuses on Internet security.
Experts in electronic trading cautioned that it was not only programmed trades but also human beings who played a part in the market drop on Tuesday.
“Hundreds of thousands of financial professionals would have seen this information with chaos ensuing,” said Rich Brown, global head of Elektron Analytics, a division of Thomson Reuters. “There’s no doubt in my mind that humans were reacting to this and it wasn’t just robots.”
But, he added: “The nature of electronic trading exacerbated the problem.”