Politics 8 May 2013 We're living in the age of the hacker Hack or be hacked. Sign up for our weekly email * Print HTML Never in the history of written communication could 140 characters have the impact that they can have now Two weeks ago, after gaining access to the Associated Press’s main Twitter account (@AP), the Syrian Electronic Army (SEA) posted a fake tweet reporting two explosions in the White House and the injury of President Barack Obama. Within seconds, US financial markets dropped by about 1%. Minutes later, Twitter was abuzz with refutations. Reporters at the White House tweeted that they felt no explosion, and AP reporters and the AP Politics Twitter account announced that @AP had been hacked. At his afternoon briefing, White House press secretary Jay Carney confirmed that Obama was indeed unharmed. Financial markets returned to their pre-hoax level. The @AP Twitter hoax represents systemic risk that cannot be eliminated, for it arises from the interaction of highly integrated financial markets and increasingly democratized news delivery. Given strong incentives for malicious parties to perpetrate such hoaxes, we should expect to see an increase in incidents. Financial markets are vulnerable to manipulation, because they are not in the business of evaluating the truth. Trading often favours first movers, so being fast but wrong can still be profitable. Imagine that a sophisticated trading firm has invested significant resources to develop an algorithm that quickly evaluates the potential market impact of news, and then automatically sends orders to trade based on that predicted impact. When that algorithm parses a tweet from the AP containing important keywords (explosion, White House, and Obama), it will send orders to sell with the expectation that the market will drop as others – first, slower algorithms, then even slower humans – start to process the same news. The first mover is happy to make such trades without verifying that the news is true. If it is true, the market will stay down or continue dropping, and the first mover will profit from the sales that it has made. If the story is a hoax, the market will probably return to its earlier, fairly valued level, and the first mover will break even on its sales, and possibly profit from any position purchased as a hedge when the market was down. The first mover’s algorithm worked, regardless of the story’s veracity. The likely losers in the @AP Twitter hoax were later movers who did not react quickly to the news, but reacted instead to the market’s movement. These late movers were also likely to have been sophisticated electronic or institutional traders; some were probably using arbitrage-based strategies that relied on the futures market for a calculation of the fair price. The market’s vulnerability to hoax stories is thus difficult to eliminate, for it is inherent in its structure. It cannot be regulated away or fixed by technology or surveillance. Even if markets moved more slowly, there would still be a first mover who responded before such a news story was revealed as a hoax. This dynamic is similar to that of an asset bubble, albeit faster. In a bubble, valuations are based on collectively evaluated evidence, and those who enter the market earliest often benefit. Whether evaluating an assumption about the rise of house prices or whether a news story is true, the market does not provide a definitive answer instantaneously. If protecting against hoaxes is not the market’s purview, can news agencies or new media entities like Twitter prevent such deception? To be sure, they have suffered reputational damage from this fiasco and will likely try to improve. But their efforts will not be enough. Twitter’s vulnerabilities were technically understood before this event, and the service was already moving toward a more sophisticated authentication model (a password paired with a one-time key from a text message or other device). Twitter will likely implement this soon. It should also consider adding an optional “two-key” system, in which an independent signoff from a separate account is required before a proposed tweet is broadcast. But, while such measures would increase the difficulty of hacking the system, no technological fix can make it impenetrable. What about the AP’s vulnerabilities? Attackers launched a “phishing” attempt against the AP’s emails shortly before the hoax tweet was sent. Phishing attacks, in which an employee is duped into sending a password to a third party or clicking an untrusted link that installs malicious software, represent a hybrid of cultural and technological failures. As attackers become more sophisticated, they send better-crafted emails, sometimes impersonating trusted sources that lure unwary users. Crafting a culture of security is difficult and often at odds with the dynamic and decentralised work environment of a fast-moving newsroom. This story can be read in full at economia Chris Clearfield is a principal at System Logic, an independent research and consulting firm that focuses on issues of risk and complexity. András Tilcsik is an assistant professor of strategic management at the Rotman School of Management at the University of Toronto. › Questions for Cameron over Lynton Crosby's links to alcohol and tobacco firms Photograph: Getty Images This is a news story from economia. 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