AP Twitter hack causes panic on Wall Street and sends Dow plunging

Wall Street collided with social media on Tuesday, when a false tweet from a trusted news organization sent the US stock market into freefall.

The 143-point fall in the Dow Jones industrial average came after hackers sent a message from the Twitter feed of the Associated Press, saying the White House had been hit by two explosions and that Barack Obama was injured. The fake tweet, which was immediately corrected by Associated Press employees, caused a sensation on Twitter and in the stock market.

White House officials were unimpressed. An AP reporter apologized for the Twitter hacking at the start of the daily White House press briefing, saying the tweet had been deleted as soon as it was discovered. A stoney-faced Jay Carney, Obama's personal spokesman, thanked the reporter but did not look amused. "The president is fine. I was just with him," added Carney.

The market recovered within a few minutes of the misunderstanding, but the incident left traders catching their breath and speculating once more about their vulnerability to breaking news in the age of social media. It also raised new questions over Twitter's security procedures.

The panic, however brief, demonstrates how tightly intertwined Wall Street has become with Twitter, a site that acts as both chatroom and news service, where journalists and publications regularly send out breaking news.

There were also concerns over what many suggested was the lurking menace of trading algorithms that scan the news and trade quickly, causing "flash crashes".

The Dow Jones Industrial Average measures the financial performance of 30 major US companies and is often used as measure of the health of the wider stock market. The Associated Press, like other wire services that provide news to other news organizations, maintains a popular primary Twitter feed, @AP, which also sends out news links to millions of people who choose to follow the service.

News organizations set their own passwords for their Twitter accounts, which makes hacking a risk. The AP said it would suspend all of its Twitter accounts until they could be checked for security.

Twitter has announced plans to introduce a "two-factor authentication" option that would make it impossible for hackers to break into accounts – even if they acquired the passwords. In February, it reset the passwords on at least 250,000 accounts, after hackers broke into its systems and were suspected of accessing users' data. But the two-factor authentication system has not yet been released.

Traders reacted with dismay to Tuesday's incident. "My initial reaction before I realized it was a fake tweet was the same horrible feeling I had when I worked at the top of the New York stock exchange when planes hit the World Trade Center," said Sal Arnuk, the head of New Jersey-based Themis Trading and the co-author of Broken Markets. "When I realized it was a fake tweet, I was outraged and ashamed that the market was able to be manipulated so easily."

Historically, it has been difficult for traders to access Twitter. The site is blocked at most major financial firms because its private messaging function presents a risk to compliance with federal regulations on managing communications, and because many managers believe it encourages timewasting.

But Twitter has been gaining in legitimacy in the markets. This month Bloomberg announced it would add Twitter to its well-respected terminals, which are special computers used by every major Wall Street trading floor.

The "flash crash" came at a tense moment, when many in finance were particularly sensitive after the Boston Marathon. Sean McLaughlin, a trader, noted on Twitter: "Traders are so scared. The littlest things set them off to sell everything."

Others attacked the allegedly pernicious influence of high-frequency trading algorithms that comb news and execute trades in nanoseconds. Jerry Khachoyan, a day trader tweeting under the handle @TheArmoTrader, summed up the view of these algorithms that engage in high-frequency trading, or HFT: "It's not the fact that @AP was just hacked," he tweeted. "It's the fact that we have HFT algos reading headlines reacting to them."

Arnuk, a well-known critic of HFT, saw the flash crash as a comment on how vulnerable the markets are to random pieces of information. He told the Guardian: "There's a substantial business by high-frequency trading hedge funds reading machine-readable news sold to them for big bucks by brand-name news organizations. The market truly wonders about regulators' ability to keep up with the very fast and speeding market over the past few years."