Social media and fake news: how do they affect financial markets?
Shrey Srivastava, London 06.05.19
LSE SE Business and Finance Guild, London School of Economics
In early 2018, American television personality and socialite Kylie Jenner tweeted negatively about the online messaging app Snapchat, causing Snap Inc. to lose $1.3 billion in market capitalisation (Yurieff, 2018). This is the first in a line of long examples that show how ingrained social media and the Internet has become to share price fluctuations in recent times. More worrying, however, is how damaging the spread of fake news can be to financial markets. $136.5 billion of value was wiped off the S&P 500 in the aftermath of a tweet from the Associated Press saying “Breaking: Two Explosions in the White House and Barack Obama is injured.” (Foster, 2013) While it later turned out that the AP Twitter account was hacked, the situation was symptomatic of a wider malaise affecting financial markets even today.
The main reason this is an issue is because a key purpose of financial markets is to facilitate the efficient allocation of capital amongst companies and sectors. This can only occur when the coverage of different companies in popular media is appropriate to their performance vis-à-vis their competitors. However, looking at recent stories we can see that this is no longer the case. For example, although Elon Musk was actually the CEO of Tesla, his tweet about taking Tesla private at $420 a share was indeed fake news because it mistakenly said that the funding for the move had been secured. This tweet, however, sent Tesla’s share price up 11% in a single day (Gottfried, 2018). When news publications publish this type of content, it can mistakenly lead investors to allocate funds to mismanaged or, at worst, fraudulent companies. Capital being inefficiently allocated in most notably the equity markets also affects the wider macroeconomy; innovative, well managed companies may not have the financial means to expand, either through broadening their product range or by moving into new markets.
Another, perhaps more insidious element of this issue is when fake news is actually perpetrated by the affected companies. Between August 2011 and March 2014, the US Securities and Exchange Commission (SEC) reported that at least 200 articles appeared without “appropriate disclosure of payment” on the popular stock-picking website Seeking Alpha (Flood, 2017). Companies such as ImmunoCellular Therapeutics (ICT) were essentially paying authors to write unduly positive articles about them. In this specific case ICT’s share price jumped by 263 per cent from the day before the article was published in January 2012 to the start of June 2012 (Flood, 2017). In later years the share price fell by thousands of percentage points as ICT’s new cancer treatment received negative clinical updates. If companies are allowed to, essentially, skew the debate around them through paying authors it again interferes with the workings of financial markets. A solution to this would then be for financial news companies to be required to publish disclosure on payments that were given to writers to publish their articles; indeed, this seems almost necessary in an age where information spreads faster than ever.
Looking at how fake news and companies themselves can influence discourse around them, then, presents many problems for retail and institutional investors. One of the most important maxims in investing, due diligence, has never been so important. Moreso, as more quantitative asset managers try to incorporate the news into their models, how they combat fake news seeping into their models will play a large role in the size of their returns. On a broader scale, national governments can try to further restrict the spread of fake news on social media; for example, the German government has rolled out legislation demanding that social media sites remove fake news from their platforms far quicker than they did before (BBC News, 2018). However, to conclude, it is clear that the spread of fake news online will remain a problem for the foreseeable future, combatable only by due diligence and strong legislation.
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