The Impact of Fake News on Financial Markets.
Fake news is a phenomenon that has been present in the society for the longest time. In recent years with the advent of multiple social media platforms and news outlets, spreading rumors has been easier than before. In the global world we live in, fake news can have drastic impact on all strata of society especially financial markets.
Remember when Jordan Belfort, Leo, the oh so charming fraudster from the cult film said “The easiest way to make money is -create something of such value that everybody wants to go out and give and create value, the money comes automatically, the money follows”. (Wolf of Wall Street, 2013). Nothing wrong with that idea really. But what was wrong was the artificial façade and the illusion of value built upon misinformation. That fiction is now a looming epidemic, especially in the financial world. And there couldn't have been a worse time for it to happen. On one hand we are seeing finance and technology converge to create Fintech start-ups that are the new growth engines, the rise of platforms that allow tech, innovators and customers fuse data to create an ecosystem, an ecosystem that thrives through AI led intelligence. But what if that data was flawed? Not just accidentally incorrect but deliberately misleading? Wouldn't that shake the very foundations of the entire new value creation. If one Jordan Belfort could cause an upheaval on the wall street imagine millions of such indiscrete and invisible scamsters chipping away at the very base of the new ambition and growth. With finance being the new hub of future economy alongside technology, wouldn’t this threaten the future itself? How would data be the new oil if it was spurious and fake? Jordan Belfort made money from his "pump-and-dump" Strategy. A pump and dump Strategy is a fraud scheme where misleading positive or exaggerated news about an owned stock increases the price of that stock in order to sell the stock at that inflated price which was bought in the market at a much cheaper price relatively. Such practices are unlawful and controllers and authorities worldwide clip down on these plans, rebuffing the individuals who execute them. In the modern world, these “pump and dump” schemes go by another name known - Fake news. How misinformation is used to influence markets- SEC had charged 27 firms and individuals for fraudulently hiring PR and communication firms to publicise their stocks. These articles were published on top financial websites like Forbes.com, Yahoo Finance, Seeking Alpha, Motley Fool and Wall Street Cheat Sheet. Writers falsely declared themselves as “an analyst and fund manager with 20 years of investment experience”. Investors seeking information for investment should be aware of fraudsters making fake websites to earn profits.
Contributors are looking for opportunities to make profits and once they have booked their position, they publish their research to reach out to a broader audience. For example, Pershing Square wanted to hold a short position on Herbalife Ltd as it expected its EPS to decline and its intrinsic value to be zero. However, Herbalife shares have fallen more than 29% and the stock is trading at the same price at which they were shorted. The goal was to undermine public confidence in Herbalife so that their $1 billion bet would produce an equal enormous return. Therefore, investors need to understand the company’s business, the obstacles, threats in the business and identify data points to determine if one’s investment thesis is on track before committing a long or a short position.
The Influence of Rumors on the Stock Market
When investors have a lesser time span to take a decision, it leads to a feeling of urgency and an endless hunt for information that could decrease uncertainty. This situation makes them susceptible to fake news that go around the market and emerges as a way out of their lack of information in order to accomplish it. Information on the financial situation of companies not yet confirmed, but already broadcasted - the so-called financial rumour - accelerates and becomes more trustworthy when it is delivered by the media, which sometimes publishes non-official information. The results confirm that the company’s responses to rumours affect price fluctuations of its share. Eagerness for information to dilute uncertainty, investors make decisions on the basis of rumours betting on the credibility of the press that publishes them, even without realizing that the information is not always reliable.
Twitter Bots manipulating stock markets There was a major study conducted of millions of tweets that found that the immense volume of tweets sent out by bots were used to drive share prices up and down in the short term. “Robot messages typically had an impact for half an hour pulling down prices and increasing volatility”. Retail investors are most likely to fall prey to such tweets as compared to institutional investors, which puts them at higher individual risk when putting their earning in the market.
Companies that fell prey to Fake News
Audience Inc (ADNC)-Audience Inc is an American voice and audio processing company. On January 29th, 2013 shares of Audience Inc fell almost 25% in a matter of seconds after information about a false report was put on twitter saying the company was being investigated for fraud. Nearly 800,000 shares of the stock were traded of the stock by 3:15 pm on that day. That is 8 times the volume of 108,000 shares over the previous 25 days. The stock fell from about 12 dollars a share to 8.87 dollars. The freefall was only halted when Nasdaq put a pause on the trading of the stock. It was later found out that the tweets were sent out by one James Alan Craig, a Scottish trader who wanted to profit from the price fluctuation. The share prices recovered once the news was debunked. Craig’s fraudulent tweets disrupted the market and caused heavy losses to investors. The graph below depicts the price data for Audience Inc on 29th January 2013. 12.45 dollars being the high point of the price after which the article was released and the share price began dropping.
Associate Press Hack-The Associate Press sent a tweet out a tweet in April of 2013 that claimed there had been two explosions in the white house and the then President Barack Obama had been injured. The Associate Press has 2 million followers on twitter and is a highly regarded source, therefore this news was quickly believed. The tweet went out at 1:07 pm at 1:08 pm the Dow jones began a nosedive. It dropped 150 points from 14697.15 to 14548.58, before stabilizing 1:10 pm. During the three minutes that one fake tweet had managed to wipe out 136 billion dollars in equity market value. The panic although extremely brief demonstrated how closely intertwined the stock markets had become with social media platforms like twitter. It highlighted the growing menace of fake news and how it can easily be spread to manipulate the markets and cost billions.The graph below display’s the drop in the Dow Jones average that was caused due to the Associate Press tweet.
Ethereum-Ethereum is a cryptocurrency that has emerged as a serious rival to Bitcoin. In June of 2017 an article was published on 4Chan with the headline “The creator of the digital currency Ethereum, Vitalik Buterin died in a car crash and insiders are selling like crazy”. The report was fake but still gave the currency price a big jolt. There was a massive panic as investors thought with the founder gone there would be no one to push the currency. There was a massive sell off due to the loss of faith that caused the market value to fall close to 4 billion dollars. The rumour was debunked when Vitalik himself took to twitter to assure people he is still alive. The tweet managed to quell the selloff however the incident highlighted how cryptocurrencies such Bitcoin and Ethereum which are already incredibly volatile to begin with can be easily subjected to market manipulation. The graph below depicts the price of Ethereum on 25th and 26th June 2017. The steep decline in the price occurred once the market received the news of his death. Once the rumour was debunked the prices started to rise again however there was a major damage that was already done.
We can say that fake news and the effect it has on the financial markets is correlated positively. Fake news has a major impact on the financial markets because of the greed to mint more money in less time and the human tendency to listen to rumors before doing your own personal research. Authorities all around the world are growing increasingly vigilant and have started taking action against the menace of fake news, but there is still a long way to go.