Tweeting Triggers Turmoil

NEW YORK -- A fake tweet with terror overtones caused financial markets to gyrate wildly for a few minutes this afternoon, the latest reminder of how technical snafus and terrorism fears can still move markets in a heartbeat.

The Dow Jones industrial average was cruising along Tuesday, up more than 150 points, before briefly plunging and then rebounding around 1:07 p.m. EST after a fake tweet on the Associated Press' Twitter site reported that two bombs had gone off at the White House and injured President Obama.

The Dow dropped nearly 143 points in a three-minute span from 1:07 p.m. ET to 1:10 p.m. ET. It plunged from 14,698.25 to 14,555.96 in that short span. But the Dow had regained all of its losses by 1:17 p.m. ET, once the AP noted on its website that its Twitter account had been hacked and that the report was untrue. The White House also confirmed that the tweet was a hoax.

The sharp drop was reminiscent of the "Flash Crash" on May 6, 2010, when the Dow tumbled almost 1,000 points in a matter of minutes due to computers-gone-wild.

Gary Kaltbaum, president of Kaltbaum Capital Management, watched the Dow's rapid plunge on his trading station. His first thought was that the market only goes down this fast if something terrible has happened.

"My exact words were, 'Who is getting bombed? And what the heck is going on?'" he recalled, adding that he quickly accessed Twitter to try to find out what had moved the market and saw the phony tweet with his own eyes. He wondered if it could really be true. "I was thinking, is it possible" that the White House has been bombed?

The market's move had financial consequences for those traders or investors who had downside stops, or pre-arranged sell orders that are triggered if a stock, stock index or futures contract fell to a certain level. "Some people lost money on that move," says Kaltbaum.

He cited a hypothetical example of how an investor in Citigroup stock could lose money. Prior to the fake tweet, Citi shares were trading at $46.49 and then quickly plunged to $45.88 before rebounding to $46.47. If an investor had a stop, or sell order at, say $45.90, that investor would have been sold out of his position and missed the rebound to $46.47 and suffered a loss of 1.2%. On the other end, if people had a buy in at lower levels and the auto buy kicked in when the market dropped, they could then sell on the rebound and would have made 1.2%.

It is unclear whether trades caused by the phony tweet will stand. Both the New York Stock Exchange and the Securities and Exchange Commission declined to comment.

"Whoever did it wanted the maximum effect, and he got it until the tweet was proved to be a dupe," says Kaltbaum.

The market's zany and unexpected plunge and recovery was the latest reminder of how quickly the market can move in an investment world driven by computers that transact trades in nanoseconds. It also shows just how jittery Wall Street is when it comes to terror attacks.

Jeffrey Kleintop, chief market strategist at LPL Financial, responded to the market's quick drop due to the hacker's false tweet on the AP's Twitter account with his own tweet that said: "Fake press releases have temporarily hit trading in individual stocks for years. With Twitter comes the ability to PR bomb the whole market."