After the AP Twitter account was hacked yesterday, Slate columnist Matthew Yglesias asked if there might be a profit in sending out fake tweets from supposedly real news sources. He was only half-joking.

The tweet, which said that President Barack Obama had been injured in a terrorist attack on the White House, shook the stock market. The Dow Jones Industrial Average dropped 146 points, from about 14,700 to 14,554, essentially making some $200 billion disappear.

Can Tiny Tweets Predict Financial Markets?

That’s a lot of dough down the drain. Can anyone profit from that? The answer is yes.

A sophisticated hacker who “shorts” Apple, that is, borrows stock and sells it in the hopes that the price will drop, and then buys it back at the reduced price, would profit. Imagine that person hacking into Apple’s Twitter account and tweeting something that makes other investors nervous. They sell, the hacker profits in a matter of minutes.

This is one reason that the Securities and Exchange Commission is looking into trading activity just before the tweet and after.

That could be a tall order though; many funds already offer ways to short the Dow Jones Industrial Average, and they are all used by legitimate investors. One could always claim that they just got lucky.

It should be said that stock market scams based on rumors are not new. During the Internet boom in the late 1990s, “pump and dump” operations were not unusual. Online message boards discussing stocks would suddenly be awash in posts touting a previously unknown Internet company that was sure to be a hit. After a while, some investors — usually individuals with little experience in the market — took the bait. Once the stock price jumped, the scammers, who were often the source of those optimistic postings about the company, would disappear, having sold off their shares. Twitter could be used to the same end. Trick someone with a lot of followers, or just hack the account, and you’ve got a ready-made pump and dump scheme.

Supercomputer Predicts Civil Unrest

Another issue the fake AP tweet highlighted yesterday was the use of computerized trading tools, also called program trading. One reason the massive sell-off happened was because investment firms often use computers to decide when to buy and sell, based on market activity that humans might not pick up on so quickly.

The algorithms vary, but the idea is to take advantage of market movement quickly. That plan may have backfired a bit on Tuesday, since the increased selling would have convinced some trading programs to sell in turn, resulting in a cascade that lowered stock prices. A similar phenomenon occurred in May 2010, when the Dow lost 600 points in only a few minutes. The market recovered then, too, but it brought new scrutiny to the program traders.

Twitter is a powerful tool for getting information out — and it can be just as much so for misinformation, or even deliberate lies. Food for thought when you see that link to news you just can’t wait to share.

Credit: Twitter Screen Grab