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1/11

@falsenews @whinytraders140 characters moved the market. Big deal

While the market reacted swiftly to the false tweet posted by the hacked AP account on April 23,

many comments on the markets reaction to the event were just as swift and premature. There

appears to be confusion between the use of headline news within automated trading and an

overestimation of the use of machine-readable news. On April 25, TABB Group measured the

institutional communitys opinions on the event. We received 234 responses. The highlights

include:

Market structure confidence has weakened slightly since August 2012, but within one key group

the buy side there has been an uptick (see pages 3 and 4).

When measuring the impact of the Hash Crash, two- thirds of participants say it has had noimpact on their market structure confidence (see page 5).

Nearly half of participants ignore social media in their investment decisions (see page 6).

Most respondents believe automated news and social media algorithms were most directly and

negatively impacted by the Hash Crash (see page 9).

Adam Sussman / Valerie Bogard

V11:016May 2013

www.tabbgroup.com


2/11

2013 The TABB Group, LLC. All Rights Reserved. May not be reproduced by any means without express permission. | 1

@falsenews @whinytraders: 140 characters moved the market. Big deal. | May 2013

Exhibit 1Survey Demographics

Source: TABB Group

Tweet This Intro

@clueless 4/23: the Associated Press (@AP) tweeted Breaking: Two Explosions in the

White House and Barack Obama is injured. Mkts tanked

@AP had been hacked #stillnotCNN

@2fast2trade TV news showing untouched White House and quick reporting that tweet was

false sent markets up

@SEC_Jobs @Finra_Jobs While the impact on prices is gone, the event is causing more

market structure debate and new investigations.

@whinytrader One argument is if a tweet can make liquidity vanish and prices drop, mkt is

at mercy of HFT

@cololoco other argument is mkts behaved perfectly. Not a reaction to tweet, but AP. Add

Boston and rational fear drove sell off

@tabbforum After similar market disruptions we reached out to the to see how these issues

impacted their attitudes

@quantclients Data is from 234 responses between 4/25-4/26. Caveats below:

Participants self-selected the type of firm where they are employed

Some of the questions are leading, but someone has to do it

Most questions are multiple choice, but we offer Other and a write-in response.

Our community is heavily skewed toward the institutional community.


3/11



Exhibit 2

Cause and Effect: Which Participants Were Most Negatively Impacted

Source: TABB Group, Dataminr

Respondents from

different firms...

mostly agree on

who got hurt

the most Retail Institutional Market Makers News/Social Media Algos Other

not

everyone

was hurt for

the same

reason

Stop

Orders,

Fear

Algos

selling into

dip;

traders

reacting to

chatter

Forced to

take more

risk or

retreat

because of

uncertainty

Allegedly first to

respond to the

tweet, they sold

into the decline;

but were they

also the first to

buy?

Lack of human

judgment

hurts all

Exchange/ATS Buy Side Broker/Dealers Vendors/Services

But if those who traded of f the news first were also the first to

identify that the information was false, isnt it a wash?

Dataminr, a social media analytics company, says that it alerted its users two

minutes before the major news outlets broke the story that the tweet was

false.

There seems to be a popular misunderstanding regarding the use of machine-readable news

and sentiment analysis in trading, exacerbated by logical inconsistencies and flawed

analysis in the arguments that attempt to blame the market reaction to the false tweet on

automated trading. First, the AP tweet was posted at 1:07:50pm; the markets did not begin

to react until 20 seconds later. If what began the sell-off were automated trading strategies

reading Twitter, then the reaction would have occurred much more quickly. However, many

respondents believe news/social media algorithms were the most negatively affected. It ismore understandable that retail and institutional sellers took a hit during the brief dip. Even

during that period, though, there were likely as many buyers as there were sellers, so the

truth is that the event probably was a wash among many types of investors.


4/11



Exhibit 3

Market Structure Confidence, 2010-2013

Source: TABB Group

Confidence Bottoms

The results from TABBs most recent poll show an increasingly weakening confidence in

market structure. This continues to be a hot area for debate and contention. The flash order

controversies in early 2010 initially spawned the publics attention, followed by the Flash

Crash in May 2010. Then, in summer 2012, the markets saw two events that again

highlighted just how tenuous the relationship is between market structure and technology:

the Facebook IPO glitch and the Knight trading error.

Now technology has jolted the markets again, although this time in a less direct way:

through the social distribution of news. Luckily, although a shock, the Hash Crash was

short-lived and markets recovered quickly. The total time of the incident was about six

minutes. For comparison, the 2010 Flash Crash lasted about 20 minutes. The question is

whether the market reacted in a rational and orderly way in light of the news and the

subsequent reaction and recovery. The question is not whether the market (HFT or

otherwise) should react to news or social media, or even whether it is fair that some

actors can react more quickly; it is whether the way in which the market reacted highlights

any structural weaknesses.

It is also important to note that current market conditions for trading venues and brokers

are exceedingly tough. How confident would these folks be even with a perfectmarketstructure? The growing conflict between exchanges and broker-owned dark pools doesnt

help, considering those are the parties most responsible for controlling and guiding market

structure. While the cause may be muddled, it is worth noting that the percentage of

respondents that now have veryweakconfidence in market structure has now quadrupled

in only three years.


5/11



Exhibit 4

Market Structure Confidence April 2013, By Firm Type

Source: TABB Group

Exhibit 5

Average Market Structure Confidence, 2010-2013

Source: TABB Group

The confidence of broker/dealers fell significantly compared to August 2012. This change

could be partly from market disturbances, but it is also certainly due in part to the current

low volumes. Broker/dealersweak confidence could be affected by their depression about

the market overall.

The confidence of asset management and hedge firms seems to be split betweengetting

betterandgetting worse.The number of buy-side firms that had a neutral view onconfidence has decreased, with slight increases to the positive and negative. Execution

venues were also split to a degree, seeing an equal increase in both those whose confidence

was very high and very weak.


6/11



Exhibit 6

Impact of Hash Crash on Market Structure Confidence

Source: TABB Group

Given that one-third of respondents to the TABB survey said the crash eroded their

confidence, the fact that overall market structure confidence was weaker is no surprise.

However, it is important to note that the vast majority of respondents agree that the Hash

Crash had no impact on their confidence.

Some could argue that, given the nature of the tweet, the question is not why the market

dropped, but why it dropped so little. The reason for the drop was not that the President

had been injured or that there were explosions at the White House; it was because people

didnt know what was happening. After a week of terror from the Boston Marathon bombing

and reports of foiled bombings in New York and Montreal, everyone was on edge, including

the market. One small tweet, especially from a news agency as respected as the AP, was

enough to confuse the market and force traders to back out and stop trading.


7/11



Exhibit 7

What markets/instruments were most negatively impacted by the hash crash?

Source: TABB Group

Most of the survey respondents believe that US equity markets were most negatively

impacted by the Hash Crash; however, we do not take this to mean that the equity market

structure is to blame. If you look at the intra-day pricing during the Hash Crash, all markets

were affected. According to conversations with trading firms, financial futures contracts

across rates and equities began to react to the tweet first. Prices were jumping around,

which alerted traders to something amiss, and they began to scale back trading. Once news

about the tweet became widely disseminated (primarily via RANSquawk), many HFTs

stopped trading altogether to wait for more information. However, given that only the AP

and even then, only its Twitter account was reporting the news, traders were able to

quickly assume the report was false. Orderly price discovery worked its way as the market

went down, and as it subsequently went back up. From a market structure perspective,

everything worked as it should have, given the circumstances.


8/11



Exhibit 8

Who is the most likely culprit for the hack?

Source: TABB Group

Who Dunnit? ... And Why?

As regulators look further into what happened, more focus has centered on whether the

hackers were really trying to manipulate the markets through the AP, or if the market

impact was simply blowback. As the FBI and SEC investigate the incident, market

participants have already started drawing their own conclusions.

The Syrian Electronic Army (@Official_SEA6) claimed responsibility for the hack minutes

after the market rebounded. However, as evidenced by our poll, this claim didnt convince

everyone. Some still believed that the intention of the hack was to manipulate the markets.

The Syrian Electronic Army has not admitted to this motive, and the more innocuous

presumption is that it is continuing its strategy of hacking news organizations. Previously,

the SEA has taken credit for hacking the Twitter accounts of the Guardian, National Public

Radio, and CBS. In these hacks, the SEA tweeted things as simple asLong Live Syria or

Syrian Electronic Army Was Here.Unless its strategy is changing to now target the

economy, the market response to the tweet was likely an unintended consequence.


9/11



How Long Will the Regulators Take?After the 2010 Flash Crash, the SEC took five months to issue a report, to the dismay of

market participants who were impatiently waiting to receive more details about what went

wrong. Respondents to TABBs current survey believe the SECs response time will be the

same if not more for this incident.

One of the reasons the SEC was delayed in 2010 was because there wasnt an efficientsystem in place for collecting all the

necessary data. That gave rise to the

Consolidated Audit Trail (CAT), a means

of tracking all securities orders and

trades in the U.S. from start to

completion. However, FINRA has said

that it wont submit the plan to develop

CAT until December 2013. Therefore,

survey respondents probably got it right

in thinking that they will have to wait

again for a report while the SEC tries totrace back the trail.

Exhibit 9:

How long will it take the SEC to issue a report on

the Hash Crash?

Source: TABB Group


10/11



About

TABB Group

TABB Group is a financial markets research and strategic advisory firm focused exclusively

on capital markets. Founded in 2003 and based on the methodology of first-person

knowledge, TABB Group analyzes and quantifies the investing value chain, from the

fiduciary, investment manager and broker, to the exchange and custodian. Our goal is to

help senior business leaders gain a truer understanding of financial markets issues and

trends so they can grow their businesses. TABB Group members are regularly cited in the

press and speak at industry conferences. For more information about TABB Group, visit

www.tabbgroup.com.

The Authors

Adam Sussman

Adam Sussman is a partner and director of research at TABB Group. Sussman joined the

firm in 2004 as a senior analyst. Before that he served as a senior product managerresponsible for order management systems, routing and next-generation trading tools

focused on the equities and options markets at Ameritrade, Inc., a brokerage industry

subsidiary of Ameritrade Holding Corp. Sussman earned a BA in philosophy and comparative

literature at the University of Rhode Island. At TABB Group, Sussman has authored a

number of reports, includingUS Equity Mid-Year Review 2012; Reinventing Capital

Markets Infrastructure; Russia 3.0: Liquidity Perestroika?; Trading Net Alpha 2012; US

Equity High-Frequency Trading: Strategies, Sizing and Market Structure; Equity Risk

Models: The Evolution of Predictions; Equity Swaps and OTC Options: A Buy-Side

Perspective; International Perspective on Transaction Cost Analytics; among others.

Valerie BogardValerie Bogard joined TABB Group in October 2012. Previously, she contributed reporting to

Newsweek, Working Mother magazine, and Above Live magazine. She attended New York

University where she graduated with a Bachelors in Journalism and Political Science.

Recently, Valerie has contributed several pieces to TabbFORUM that focus on the regulatory

and political aspects of capital markets. She recently co-authored the report Cross-Listing:

The Tension of Cooperation.
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