How Many HFT Firms Actually Use Twitter to Trade?

Tuesday’s fake tweet from the Associated Press’s hacked Twitter account, reporting explosions at the White House that injured President Obama, has sparked renewed criticism of high frequency trading, specifically how some computer traders use social media as an input into their trading strategies.

Though it’ll be months before we know exactly what happened, the consensus is that a handful of trading algorithms responded to the fake tweet by selling a broad range of stocks, bonds, and commodities. As message traffic spiked and prices started declining, HFT firms started backing out of the market, just as they did during the May 2010 Flash Crash. As a result, liquidity dried up, as you can see here in this chart from Nanex. Since there were suddenly relatively few buy orders to match against all those sell orders flooding the market, the dip picked up speed.