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Fake Terror Tweet Should Be 'Wake-Up' Call: Pros

Adam Jeffery | CNBC

The fake tweet that sent the stock market scurrying Tuesday should be a "wake-up call" to regulators that social media presents a major threat to investing, traders said.

Sparking memories of the Flash Crash that sent markets spiraling nearly three years ago, Wall Street took another jolt after someone apparently hacked the Associated Press Twitter account, and tweeted that there had been two explosions at the White House and that President Barack Obama was injured.

(Read More: Markets Plunge Briefly on Fake AP Terror Tweet)

For Sal Arnuk, a principal at Themis Trading who advocates reform of the high-speed machinations that have taken over trading, the memories were all too familiar.

He's seen the market undergo numerous stressful episodes that have, for the most part, eluded the Securities and Exchange Commission.

"At what point do we actually see the SEC recognize that they've created a marketplace that they can't control?" Arnuk asked. "Where did the fake Tweet come from? A kid in Uzbekistan? A hedge fund in India? A Russian mobster? Who can regulate it? The answer is, no one at this point."

While there are no easy answers in a situation like Tuesday's, where a market run started on a social networking site, Arnuk said that regulators ought to at least identify who's benefiting.

(Read More: Stocks Bounce Back After 'Bogus' AP Tweet)

Large data providers are selling news feeds from Twitter and other social media sources to trading houses, which then use computer programs and algorithms to make lightning-fast trades, the likes of which sunk the Dow industrials 72 points in a matter of seconds before word spread that the AP tweet was bogus.

"These machines read news feeds and are meant to feed engines that are looking to pick off prices and take advantage of the marketplace, especially in times of stress," Arnuk said. "This is good for investors? I know this is good for trading firms."

"This is a wake-up call for the marketplace," he added. "During times of stress, people should understand that unpredictable things can happen."

Kevin Ferry, president of Cronus Futures Management, said odd movement earlier in the day by the Standard & Poor's 500 mini futures contract suggested that the AP tweet was planted by a trader looking to make money off it.

(Watch: Fake Terror Tweet Sends Stocks on Wild Ride )

"There has never been this broad spectrum of total domination of open interest by the speculative community in the history of the game," Ferry said. "This isn't going to go away."

Others also took notice and said the vanishing of liquidity was blinding.

"It was unprecedented in terms of how fast liquidity disappeared and trading activity pegged at extreme levels," said Eric Hunsader, founder of Nanex. "When you value speed over everything else, you end up with algos that will shoot first and ask questions later, There's simply no time for them to do any fact-checking."

—CNBC's Lori Spechler contributed to this report.

—By CNBC.com's Jeff Cox. Follow him on Twitter @JeffCoxCNBCcom.

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