The 2 Scariest Market Events This Week

Stocks lost ground on Friday, with the S&P 500 (SNPINDEX: ^GSPC  ) down 0.2%, while the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) gained 0.1%. Still, with a very respectable 1.7% weekly gain, the S&P 500 managed to claw back most of last week's losses.

Mirroring yesterday's one hundredth of a point gain, the VIX Index (VOLATILITYINDICES: ^VIX  ) , Wall Street's fear gauge, fell one hundredth of a point today to close at 13.61. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

When market machinery breaks down
On Tuesday, at approximately 1:07 p.m. EDT, the following 12-word tweet from the Associated Press's Twitter feed roiled U.S. equity markets:

Breaking: Two Explosions in the White House and Barack Obama is Injured.

The report, which was fake (the AP Twitter account had been hacked), was quickly removed by the AP and denied by the White House. The effect on stocks was a brief 1% decline that was erased in the space of minutes. Nevertheless, the downward spike in the intraday graph illustrates that, in the moment, the episode must have been unsettling for market participants:

Source: Yahoo! Finance

The incident also shows the degree to which Twitter's social networking platform has become a key component of the information infrastructure that drives financial market activity. I can attest from personal experience that breaking stories break on Twitter much before they are reported by traditional media outlets.

Two days later, a software problem halted options trading on the Chicago Board Options Exchange, or CBOE, the U.S.' largest options exchange, for more than three hours. That was no way to celebrate today's 40th anniversary of the CBOE's first trading day; on April 26, 1973, 911 contracts changed hands, with call options available on 16 U.S. stocks. Beyond individual stocks, the outage meant options on two key indexes, the S&P 500 and the VIX Index, were unavailable.

In the wake of the 2010 "Flash Crash" and last-year's near-failure of Knight Capital due to a rogue algorithm, market participants are much more sensitive to these types of events; but should they have investors concerned? Not really -- not as long as they are truly investors, i.e. they have a multi-year time horizon. For traders, on the other hand, price spikes and unavailability can be very costly. Still, even fundamental investors may want to review my Best Practices for Investors in a Microsecond Market; it pays to be prepared.

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Correction:
The CBOE is not part of the CME Group. It is a subsidiary of CBOE Holdings. The Fool regrets the error.


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