The Haphazard Blog

Over the long weekend, there were reports that iTunes accounts were hacked and fraudulent purchases were made in iTunes and the App Store. Most notorious was a single author having a lot of his books in the top 50 in iBooks. Yesterday, Apple responded with the following:

The developer Thuat Nguyen and his apps were removed from the App Store for violating the developer Program License Agreement, including fraudulent purchase patterns.

Developers do not receive any iTunes confidential customer data when an app is downloaded.

Engadget also reported that roughly 400 iTunes users were affected by this. To me, all of this does not make sense. I still have questions, and as far as I can tell, the press has taken Apple’s word and moved on to other things.

1. How was a developer able to make fraudulent purchases on other users’ behalf?
2. Is Apple implying that Apps this developer made were able to do this? If so, what have they done to prevent other developers from doing the same thing? Have they issued a remote kill on his Apps? This would seem to be a very big security issue. (Also, some of the people who reported the fraudulent activity claimed they never purchased anything from that developer).
3. If they aren’t implying that, what other mechanism was used by this developer?
4. Apple’s own PR says that over 1.5M books were downloaded in the first 28 days. Since then, over 2M more iPads were sold. It took only 400 iTunes accounts to push 42 books into the Top 50? On the surface, it seems like a very low number of books (assume 400 copies of each) to take over the Top 50. Are sales for popular books that low?

I hope people out there are doing some more digging on this and not just taking Apple’s statement as the full story.

The big news today was the 1000 point drop of the Dow. Early blame is being placed on a bad order for Proctor & Gamble stock. So that makes sense. If a bad order for P&G is executed it’s one of 30 stocks that make up the Dow Jones Industrial Average, so it would send it down a fair amount. But that doesn’t explain all the other stocks dropping.

At 2:45 PM. the DJIA moved from 10,236 to 9,872 (fell 3.6%) )and back to 10,203 (gained 3.4%) in 5 minutes. The NASDAQ, which has over 3,000 components fell 2.6% and gained 2.7% in the same period. The Russell 2000 fell 2.3% and gained 2.7%. Lastly, the S&P 500 fell 1.7% and gained 3.5%.

So it wasn’t just one stock, it was the entire market as a whole that had a very quick drop and a subsequently quick recovery. I believe that the only way that the markets could move that fast and that much is through computerized trading. There was not a massive sell off by humans placing sell (or short) orders.

Instead, the primary culprit was High Frequency Trading and Flash Trading followed by automated trading and the triggering of stop-loss orders. I think it is this last thing that is going to have human investors very upset.

To put it simply, investors will place a stop-loss order to try and limit their losses. What happens is an investor will buy a stock like Apple at $250/share. They will then place a stop-loss order at say $220 to limit their losses to roughly $30/share. The problem here is that computers caused an artificial and drastic move downwards by mostly trading amongst themselves that pushed Apple down below $200. So the investor had their stock sold at $220 as Apple plunged because of this fiasco. Then the market quickly corrected and Apple was back to $246 (and really was under $220 for less than 5 minutes. The investor has lost over $26/share and Apple stock went back to a proper price.

Congress has already been talking about financial reform and tomorrow, and maybe over the next week, they will be pointing to this event as another reason it is so badly needed. This won’t end at a bad trade.