When stock markets momentarily plunged today, following an erroneous tweet by the Associated Press reporting explosions at the White House, someone somewhere could have made a whole lot of money.
Algorithmic trading bots react instantaneously to keywords in news reports and even tweets, which is likely why the market fell so quickly. Stocks started to recover about three minutes later but took seven minutes to return to their earlier levels.
Mom-and-pop traders could hardly move in time to profit off the dip, but seven minutes is an eternity in the world of high-frequency trading, where equities are exchanged in fractions of a second. Trading bots could certainly have bought index funds at the bottom of the plunge, quickly profiting as the rest of the market realized that the AP tweet was wrong.
And imagine if whoever hacked the AP’s Twitter account intended to profit from it. He, she—or, as it currently appears, the Syrian Electronic Army—could have shorted an index fund, or bet that it would fall, then quickly purchased stocks before the rest of the world realized what happened.
This is a variation of how bitcoin hackers apparently work. They sell bitcoins at a high point against dollars, then overload bitcoin exchanges with traffic. This causes the exchange to crash and spurs panic selling. When hackers believe the market has stabilized, they can buy back in to bitcoins, pocketing the difference.
Equities exchanges are generally more stable than bitcoin markets, but for a few minutes today, they weren’t.