THE WALL STREET JOURNAL. Friday - Sunday, April 26 - 28,2013 | 23

BUSINESS &FINANCE

In a Wired World, Feeds Drive Trading E - R e a d e r s More traders and Investors are uslng complex computer programs to sean for news and make Instant buy or sell declslons.

B Y GEOFFREY ROGOW

A N D TELIS DEMOS

When the words "explosions" and "White House" popped up Tues-day on a verified Associated Press Twitter account, computéis in the bare-bones offices of a New York City startup sprang into action.

The computers, housed in the Madison Avenue headquarters of a company called Dataminr, sent alerts to clients like hedge funds and government agencies about the apparent news. Shortly thereafter, the Dow Jones Industrial Average tumbled 145 points in seconds.

But the machines weren't fooled: Before the AP announced that the tweet was a hoax—its account had been hacked—Dataminr's computers generated a fresh alert saying the news may not be legitímate.

Moments later, shares rebounded across the board, and the blue-chip index ended the day with gains greater than before the incident.

Tuesday's tumult is shining a light on the investment world's use of sophisticated computers pro-grammed to sean news streams—in-cluding those from Twitter and other social media—to make buy or sell decisions in fractions of an in-stant.

The technology has been around for several years, but it is increas-ingly finding adherents among fi-

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nancial firms, including hedge funds, investment banks and even long-term investors such as mutual-fund companies. Experts say traders use the data for just about every kind of investment around the world, from U.S. stocks to the Ko-rean won.

To some on Wall Street, the Se-curities and Exchange Commission's recent decisión to allow companies to release material information via Twitter had "legitimized" the strat-egy, said Ted Bailey, chief executive and founder of four-year-old Dataminr. The company is lately "making a lot" of headway with large hedge funds and government clients, he said.

The roots of these computer pro-grams go back to those built by me-dia companies and hedge funds to trade around publicly disclosed in-formation, such as earnings and economic data, say traders and pro-grammers.

Media firms including Dow Jones, Bloomberg and Reuters be-gan setting up "elementized news feeds" around 2006. With the feeds, this public information was piped nearly instantaneously to data cen-ters and sold to trading firms. Dow Jones publishes The Wall Street Journal.

These trading firms would then devise computer programs to buy and sell based on an earnings report

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being up or down, or a firm being named in a lawsuit.

Some of the new programs are rather simple, looking for key words in verified accounts of major news sources. Others use complex algo-rithms to detect patterns. Dataminr's program works by pro-cessing hundreds of millions of daily tweets instantly to find credible and actionable information that they can share with clients.

Dataminr looks at dozens of vari-ables about each tweet, such as the influence of the user, the geo-loca-tion of where the tweet is sent from, and how tweets are clustered to-gether.

In 2010, Johan Bollen, an associ-ate professor at Indiana University and two other professors published research showing how using Twitter could with more than 85% accuracy predict the daily up and down read-ings of the Dow.

Some investors that use news-scraping programs draw the line at Twitter, however. "The accuracy of tweets is a major concern," said Zeid Barakat, co-founder of Flyberry Capital, a startup that uses high-speed strategies to trade commodity futures around news events.

Credit Suisse AG doesn't use these sorts of algorithms because the technology is still developing, said Dan Mathisson, the head of U.S. equity trading.

Tuesday's incident "doesn't hap-pen often enough to make it worth-while" to invest in such technology, he said

Others say being first is a critical advantage. Selerity Inc., based in Jersey City, N.J., detected an August 2012 tweet from a person who wit-nessed a fire at a Chevron Corp. re-finery in Richmond, Calif., near San Francisco, news that hadn't reached the broader media according to the firm's founder, Ryan Terpstra. The tweet read "oh [expletive] the chev-ron refinery in richmond [is] on fire!!!"

Selerity alerted clients, who were able to buy gasoline futures contracts before the news spread widely and caused prices to soar, says Mr. Terpstra.

In the case of Tuesday's commo-

] Headlines Ii •! Government fillngs

1 Computers track streams of news headlines, government fillngs and social media such as Twitter.

tion, Dataminr's computers not only flagged the event but the algorithms noticed quickly that there was no corroboration. Unlike the Boston Marathón bombing a week earlier, there were none of the telltale signs of a disaster: no sudden swell of tweets from people in the vicinity of the White House, for instance, Mr. Bailey said

The company alerted customers to another tweet, from a repórter at the White House, saying the report appeared to be a false alarm. The AP and White House quickly issued official denials of the explosions shortly thereafter.

One of the first firms to embrace the small but growing industry be-ing created around social media and investing was New York-based Rav-enPack.

The business, begun in 2007, now has dozens of hedge funds, mu-

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2 A computer algorlthm hunts for preprogrammed keywords that mlght move financlal markets or Individual stocks.

The Wall Street Journal

tual funds and large banks as cli-ents, all of which have embraced so-cial media more aggressively in the past year, said Armando González, chief executive of the real-time news analysis firm. The company to-day counts several institutional in-vestors with more than $5 billion in assets under management as clients of its social-media producís.

When Tuesday's mini-crash hap-pened, Mr. González said he was in-undated with questions from clients about how the incident could hap-pen. Most wanted to be sure that RavenPack was using information only from trusted sources, which he said they had.

Mr. González said he finished an-swering questions from clients at 2 a.m.

—Scott Patterson, Chris Dieterích and Liz Moyer contributed to this

article.

H a c k At tack Trading volumes spiked on Tuesday as a fake tweet from an Associated Press account quickly careened through markets.

Based on those keywords, along with the rellablllty of the source and other Information, buy or sell orders are trlggered.

News-scraplng programs also look for tweets with the words 'hacked' or 'hoax', which would reverse the trading strategy.

Firms to Push On With Social-Media Disclosures B Y JESSICA HOLZER

A N D GREG BENSINGER

WASHINGTON—Tuesday's short-lived hoax 011 Twitter Inc. won't de-ter companies from disseminating market-moving information using social-media sites.

Meanwhile, Wall Street firms are plowing ahead with plans that could give some employees access to these sites at work.

After a fraudulent Associated Press tweet claiming that two explo-sions at the White House had in-jured President Barack Obama, the Dow Jones Industrial Average dropped 145 points in an instant. The market quickly recovered

Securities and Exchange Com-mission member Luis Aguilar on Wednesday called on his agency to look into the Twitter hoax and said the SEC hadn't determined who car-ried it out or why. "Where it ap-pears that the securities markets have been manipulated in violation of the federal securities laws, the SEC should undertake a serious in-quiry," Mr. Aguilar said.

An SEC spokesman said: "We

have standard operating procedures whenever there are market develop-ments, and this is no exception. These procedures start with getting the faets about what occurred. We do not limit ourselves to looking at the catalyst for an event, but also its repercussions, to determine whether any further inquiries or ac-tions are warranted"

In addition, Commodity Futures Trading Commission member Bart Chilton said CFTC officials are look-ing into the trading. The selloff "raises larger questions about how technology is used" in the market, Mr. Chilton said. "Somebody lost money, and not everybody who got out got back in."

Allowing broader employee ac-cess to social media on Wall Street could remove a roadblock that com-panies say discourages them from using social media as an exclusive channel for major announcements. Companies want to communicate di-rectly with their investor bases but are concerned that tweets and posts won't reach a vital constituency: Wall Street stock analysts and insti-tutional investors.

"Most of our investors are still using traditional channels to get their information," Zillow Inc. Chief Executive Spencer Rascoff said in an interview. He said Zillow, an online real-estate company, won't use so-cial media exclusively but as an ac-companiment to other traditional means of disseminating corporate news—partly because of the restric-tions on bank employees. "The idea is to spread the word to the broad-est group possible," Mr. Rascoff said

Zillow said Wednesday that it would begin disclosing earnings and possibly other material information via Twitter and Facebook Inc., fol-lowing the lead of Netflix Inc., which this month said it may use Facebook or Twitter to occasionally disclose material information. Zil-low also plans to take some ques-tions from social-media sites when it releases its first-quarter results in early May.

The Twitter hoax won't affect the company's disclosure plans or those of companies like Dell Inc. and Exxon Mobil Corp., which have indicated they will use social media

to commimicate corporate news, ac-cording to company officials.

AutoNation, Inc., which runs car dealerships, said it has no plans to alter its decisión to have CEO Mike Jackson disclose material informa-tion on his Facebook page and Twit-ter. "WeVe already taken steps to safeguard against hacking," a spokesman said, noting email poses similar security issues.

Banks say they consider sites like Twitter an increasingly important news source and expect them to be-come essential outlets given the SEC's recent blessing of social me-dia as a way for companies to dis-close market-moving information.

If anything, the Twitter crash has reinforced the view at some banks that employees need access to social media so they can see and judge information for themselves.

"It has not changed our plans. All aspeets of any tool we use are carefully evaluated prior to imple-mentation," a Bank of America spokeswoman said

Bank of America plans to loosen restrictions that bar most of their employees from accessing Facebook

and other sites. Morgan Stanley, Citigroup Lic., and Goldman Sachs Group Inc. also are considering re-laxing prohibitions to give more em-ployees access to social media.

Most Wall Street banks restrict access to social media—as well as Gmail and other private sites— largely because of SEC rules requir-ing securities firms to store all com-munications, including tweets and posts. Some employees may view public-company Twitter feeds through Bloomberg termináis.

The SEC's social-media guidance has prompted Morgan Stanley to consider allowing access to sites "within a controlled environment" a spokeswoman said. The bank freed up its brokerage sales forcé to use Linkedln and Twitter on a limited basis last year.

Citigroup is looking at granting stock analysts limited access to so-cial-media sites so they can follow companies, a bank official said Goldman Sachs is exploring ways to give employees greater access to so-cial media, a spokeswoman said.

—Scott Patterson contributed to this article

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