How mis­in­for­ma­tion is used to in­flu­ence mar­kets

We know that fake news played a role in the elec­tion of US Pres­i­dent Don­ald Trump and the out­come of the Brexit ref­er­en­dum. But it is also be­ing used to in­flu­ence stock mar­kets.

Finweek English Edition - - Marketplace - By Mariam Isa ed­i­to­rial@fin­ Mariam Isa


news has be­come a buzz­word in pol­i­tics since US Pres­i­dent Don­ald Trump was elected last year, but the rapid spread of de­lib­er­ate mis­in­for­ma­tion has also taken hold in fi­nan­cial mar­kets, mak­ing in­vest­ment de­ci­sions for both in­sti­tu­tions and in­di­vid­u­als more dif­fi­cult.

Ma­nip­u­la­tion of share prices for profit has been around since stock mar­kets were first cre­ated cen­turies ago, but in the past few years the rise of so­cial me­dia has boosted the trend at an alarm­ing pace.

Peo­ple are in­creas­ingly us­ing Face­book, Twit­ter and anony­mous web­sites on the in­ter­net as their main sources of news, mak­ing them­selves vul­ner­a­ble to in­ac­cu­rate or de­lib­er­ately fal­si­fied in­for­ma­tion which in­forms their opin­ions and de­ci­sion-mak­ing.

Anal­y­sis by US com­pany Buz­zfeed showed that the top

20 fake sto­ries about the US pres­i­den­tial elec­tion last year re­ceived more en­gage­ment on Face­book than the top 20 news sto­ries from the ma­jor me­dia out­lets. Fake news also played a key role in the Brexit vote in the UK, with well-tar­geted sto­ries and pho­to­graphs from the “Leave” camp be­lieved to have swayed the out­come.

Both of these events took fi­nan­cial mar­kets by sur­prise and had deep reper­cus­sions for the economies, cur­ren­cies and stock mar­kets of the two coun­tries. There are many other cases – in 2013, US stocks lost $130bn of their value in re­sponse to a tweet from the Associ­ated Press say­ing that Barack Obama had been in­jured in an ex­plo­sion. The news or­gan­i­sa­tion sub­se­quently said its Twit­ter ac­count had been hacked.

This was an ex­am­ple of fake news be­ing used to knock a share price down, pro­vid­ing a buy­ing op­por­tu­nity for the per­pe­tra­tors to buy the stock know­ing that it would re­cover when the false­hood was ex­posed. At the same time, un­scrupu­lous com­pa­nies have be­gun pay­ing jour­nal­ists to write favourably about the stocks they hold and pre­sent­ing the ar­ti­cles as ob­jec­tive re­search, push­ing the share price up.

Of­ten the writ­ers du­pli­cate their sto­ries un­der nu­mer­ous pseudonyms, in an of­ten suc­cess­ful bid to in­flu­ence mar­ket sen­ti­ment. Spoof web­sites that mimic cred­i­ble coun­ter­parts are also fre­quently used to spread false in­for­ma­tion, and writ­ers some­times fal­sify their back­ground to make their re­ports cred­i­ble.

The trend has been par­tic­u­larly dam­ag­ing in the US. In April, the Se­cu­ri­ties and Ex­change Com­mis­sion (SEC) is­sued an alert warn­ing in­vestors that seem­ingly in­de­pen­dent com­men­tary on in­vest­ment re­search web­sites may in fact be part of paid stock pro­mo­tion cam­paigns.

The SEC said it had charged 27 par­ties – in­clud­ing public com­pa­nies, firms, and writ­ers – with fraud for gen­er­at­ing such ar­ti­cles, in which some or all of the writ­ers al­legedly failed to dis­close that they had re­ceived pay­ment or en­gaged in “scalp­ing” – which is rec­om­mend­ing a stock to drive up its price and then sell­ing shares at in­flated prices.

Dur­ing the same month, a sur­vey by the Amer­i­can In­sti­tute of Char­tered Pro­fes­sional Ac­coun­tants showed that 63% of Amer­i­cans be­lieved that the spread of fake news made it harder to make crit­i­cal fi­nan­cial de­ci­sions, par­tic­u­larly when it came to health­care, re­tire­ment, or buy­ing a house. More than half of the 1 000 re­spon­dents said that they ex­pected fake news and mis­lead­ing head­lines to be­come more preva­lent.

Euro­peans have also taken note – Ger­many has passed a con­tro­ver­sial law un­der which Face­book, Twit­ter and other so­cial me­dia com­pa­nies could face fines of up to €50m for fail­ing to re­move “ob­vi­ously il­le­gal” con­tent within 24 hours. It will take ef­fect in Oc­to­ber.

In Jan­uary, the UK launched a par­lia­men­tary in­quiry into the “grow­ing phe­nom­e­non” of fake news, and China has cracked down on false sto­ries cir­cu­lat­ing on so­cial me­dia that were af­fect­ing stocks and hous­ing prices.

One of the big­gest prob­lems for de­vel­oped economies is that most trade is now car­ried out by tech­nol­ogy- and com­puter-driven al­go­rithms, which lack the hu­man judg­ment more ca­pa­ble of iden­ti­fy­ing fraud. This is one of the rea­sons why the trend has not yet sur­faced in South Africa, but Old Mu­tual man­aged eq­uity fund an­a­lyst Fawad Fakier warns that it is in­evitable in a few years’ time.

In­di­vid­ual in­vestors world­wide are be­ing ad­vised to pro­tect them­selves from fake news by tak­ing sev­eral steps. First, re­search the source to con­firm that it is au­then­tic, es­pe­cially if the out­let is un­fa­mil­iar. Read some of its other ar­ti­cles, and be wary of at­ten­tion-grab­bing head­lines, and ty­pos in the copy. Look for con­text and cross-check the author’s cre­den­tials.

Avoid quick, re­ac­tive de­ci­sions based on un­sub­stan­ti­ated news that may turn out to be just ru­mours, and be cir­cum­spect about opin­ions or pre­dic­tions on the out­come of break­ing news, even if the news it­self is real. Iden­tify your per­sonal bi­ases – which can be ex­ploited – and watch out for spoof web­sites.

Lastly, ed­u­cate your­self thor­oughly about the com­pa­nies and fi­nan­cial prod­ucts you are in­ter­ested in – look at ver­i­fied track records. ■

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