How misinformation is used to influence markets

Fake 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.

Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.

This article originally appeared in the 24 August edition of finweekBuy and download the magazine here.

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