Acting on unverified data: the signal that was a lie

Graduate · enrolled learners

This lesson opens with The AP Twitter hash crash, 23 April 2013.

What happened

Hackers took over the Associated Press Twitter account and posted a false message that there had been explosions at the White House and that the president was injured. Automated trading systems that scanned news and social feeds for tradable signals read the message and reacted in an instant, selling, and in about three minutes the S&P 500 fell roughly one percent, wiping out an estimated 136 billion dollars of value, before the tweet was exposed as fake and the market recovered just as fast. The systems had no way to know the source had been compromised: they treated a message from a trusted account as a trusted signal, and acted on it at machine speed before any human could ask whether it was true. Nothing about the trades was a bug; the algorithms did exactly what they were built to do, which was to trust the feed. The failure was upstream, in taking a data source's authenticity for granted, so a single lie injected into a trusted feed became millions of very real trades.

The decision point

A trading system that acts on a data source is trusting not only the content of that source but its authenticity, and if the source can be compromised, spoofed, or simply wrong, the system will act on the lie at machine speed, before anyone can intervene. The AP hash crash is the case: algorithms scanning a trusted news feed traded instantly on a hacked account's false message, moving the market by an estimated 136 billion dollars in minutes, because they had no way to know the trusted source was lying. This sharpens the prior lesson: it is not enough for a feed to be up and fresh, it must also be telling the truth, and a system that treats any message from a normally-reliable source as automatically trustworthy inherits every way that source can be compromised or mistaken. The speed that makes automated trading powerful is the same speed that makes an unverified signal dangerous, because there is no human in the loop to say that headline cannot be right before the orders are already sent. So the discipline is to treat a signal's provenance and authenticity as part of its validity, not just its content: to weigh how much a source can be trusted, to require corroboration for a signal extreme enough to move the book, and to build in limits and human confirmation for actions large enough that being wrong is catastrophic, because the AP hash crash showed that a system fast enough to trade a headline in milliseconds is fast enough to trade a lie in milliseconds, and the only defense is to have doubted the source before the message arrived.

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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