When Twitter storms cause financial panic

It seems that incorrect information, rumours, hoaxes and hearsays will inevitably bamboozle financial markets from time to time. The consequences appear frightening but some argue this sort of noise is actually necessary for trading.

On the morning of 22 January 2013 a story started to develop on Twitter about the imminent and unexpected resignation of Jens Weidmann, the CEO of Deutsche Bundesbank.

The first documented tweet came at 10.02am and was traced back to an anonymous blog profile called “Russian Market”, which currently has just over 23,000 followers.

In 25 minutes the information had been exposed 256,634 times and by 10.20am the euro had fallen from 1,3340 to 1,3267 against the US dollar, dropping 0.55% in value. Decimal movements like these may seem insignificant but given the heavy gearing of the international currency markets, vast amounts of money can be made on micro movements if you can control the fluctuations and have this information prior to all other investors.

The rumour was not only tweeted and re-tweeted by wild market desperados and self-appointed experts but also by more established parties in the business. Stock traders at banks and finance editors at established newspapers ran with it too.

When a spokesman from the Deutsche Bundesbank issued an official denial of the rumour, which hit Twitter at 10:20am via the Dow Jones/Wall Street Journal, it was with the rather strong wording “komplette blödsinn”, meaning “utter garbage”. In just seven minutes, the official denial of Weidmann’s resignation had been shared 344,863 times on Twitter and in the meantime the euro had pretty much re-stabilised to the same value it had before the rumour mill went into overdrive.

The Weidmann case is not isolated. Social media platforms have more than once been used as vehicles for spreading junk evidence that has excited the markets in unfortunate ways.

The AP hoax Tweet that caused a financial wobble.

On 23 April 2013 a “hoax tweet” was sent from the Associated Press, which appeared to have had its account hacked. The tweet read: “Breaking: Two Explosions in the White House and Barack Obama is Injured" and caused widespread panic in the financial sector. The US stock market crashed within minutes and the CBOE Volatility Index, also known as “the fear index” because it predicts potential volatility in the market surged 10%.

During this storm, the S&P 500, the NASDAQ and crude oil all dropped 1% and the broader market apparently lost almost US$200 billion.

Noise traders

It seems that incorrect information, rumours, hoaxes and hearsays will inevitably bamboozle financial markets from time to time. The consequences appear frightening but some argue this sort of noise is actually necessary for trading.

The American economist and former president of the American Finance Association, Fisher Black has argued that some traders, known as noise traders, act on mistaken or incorrect information and feel overly confident that this information gives them an edge but that this is in fact a false sense of security. Even more alarmingly, Black suggests that noise trading is in fact essential to the existence of liquid markets and that noise from these traders makes financial markets imperfect, which in fact makes them possible.

If markets were efficient in the sense that everybody has access to, and can act on, correct information, there would be no such thing as profitable trading, so trading would stop.

If traders won’t trade, the market will no longer be liquid. That would be the end of it. There would be no information in stock prices and the scarce capital of society would be be misallocated. Markets must suffer from imperfection and for that to happen, some traders need to be less well-informed than others. Some act on information and others act only on noise. And so the market keeps moving.

In a world in which businesses rely so much on algorithms to automate their processes, noise can infiltrate the retail sector too. The results can be more amusing than alarming, such as when a book about moths ended up being listed on Amazon at a price of more than US$23 million. Behind this absurd tale was the use of automatic price-setting algorithms by two retailers – Bordeebook and Profnath. Each had set their prices according to what the other was doing. Bordeebook’s algorithm would set the price at 0.9983 of whatever Profnath was charging and the latter was setting its own price at 1.270589 more than its rival. This automatisation of price adjustment led to the gradual increase in price that ultimately resulted in the absurd valuation of the book.

Noise makers

If noise traders are needed to make financial markets function, perhaps noisemakers are just as necessary for the functioning of the blogosphere. Black seemed to anticipate this when he wrote in 1985: “I suspect that if it were possible to observe the value of human capital, we would find it fluctuating in much the same way that the level of the stock market fluctuates.”

Over in finance, the smart money drives out the dumb money. Sophisticated traders, have adequate information and rational expectations. They can correctly balance asset price against its fundamental value. They will win out over noise traders, who make bad decisions based on informational misconceptions and false beliefs about a risky asset’s price and the underlying financial instrument’s fundamental value.

Noise makers or trolls in the blogosphere and on social networks may fuel the fire of heated debate and facilitate exchanges of opinions.

Bubbles of opinions, or conviction peaks, may grow accordingly for or against a certain company, person, position, policy or viewpoint without necessarily reflecting real personal preference or even the facts. False information can spread online and can have serious consequences, as was seen in the high-profile case of Robin McAlpine in the UK.

But if it becomes clear that the aligned convictions of Twitter users or bloggers are based on noise and social proof rather than correct information and convincing arguments, then the bubble that has been created may quickly deflate. If no new evidence emerges to fan the fire, the Twitter storm dies out.

If the rumours are based on correct information, they are more likely to endure. As we become more accustomed to using new media, we, like the well-informed stock broker, should be able to learn how to separate the wheat from the chaff, the bad information from the good.

Vincent F Hendricks does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

The Conversation

This article was originally published at The Conversation. Read the original article.

Traders work on the floor of the New York Stock Exchange. Photo: Getty

Vincent F Hendricks is Professor of Formal Philosophy at the University of Copenhagan.

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Meet Anne Marie Waters - the Ukip politician too extreme for Nigel Farage

In January 2016, Waters launched Pegida UK with former EDL frontman Steven Yaxley-Lennon (aka Tommy Robinson). 

There are few people in British political life who can be attacked from the left by Nigel Farage. Yet that is where Anne Marie Waters has found herself. And by the end of September she could well be the new leader of Ukip, a party almost synonymous with its beer-swilling, chain-smoking former leader.

Waters’s political journey is a curious one. She started out on the political left, but like Oswald Mosley before her, has since veered dramatically to the right. That, however, is where the similarities end. Waters is Irish, agnostic, a lesbian and a self-proclaimed feminist.

But it is her politics – rather than who she is – that have caused a stir among Ukip’s old guard. Former leader Paul Nuttall has said that her views make him “uncomfortable” while Farage has claimed Ukip is “finished” if, under her leadership, it becomes an anti-Islam party.

In her rhetoric, Waters echoes groups such as the English Defence League (EDL) and Britain First. She has called Islam “evil” and her leadership manifesto claims that the religion has turned Britain into a “fearful and censorious society”. Waters wants the banning of the burqa, the closure of all sharia councils and a temporary freeze on all immigration.

She started life in Dublin before moving to Germany in her teens to work as an au pair. Waters also lived in the Netherlands before returning to Britain to study journalism at Nottingham Trent University, graduating in 2003. She subsequently gained a second degree in law. It was then, she says, that she first learnt about Islam, which she claims treats women “like absolute dirt”. Now 39, Waters is a full-time campaigner who lives in Essex with her two dogs and her partner who is an accountant.

Waters’s first spell of serious activism was with the campaign group One Law for All, a secularist organisation fronted by the Iranian feminist and human rights activist Maryam Namazie. Waters resigned in November 2013 after four years with the organisation. According to Namazie, Waters left due to political disagreements over whether the group should collaborate with members of far-right groups.

In April 2014, Waters founded Sharia Watch UK and, in January 2016, she launched Pegida UK with former EDL frontman Steven Yaxley-Lennon (aka Tommy Robinson). The group was established as a British chapter of the German-based organisation and was set up to counter what it called the “Islamisation of our countries”. By the summer of 2016, it had petered out.

Waters twice stood unsuccessfully to become a Labour parliamentary candidate. Today, she says she could not back Labour due to its “betrayal of women” and “betrayal of the country” over Islam. After joining Ukip in 2014, she first ran for political office in the Lambeth council election, where she finished in ninth place. At the 2015 general election, Waters stood as the party’s candidate in Lewisham East, finishing third with 9.1 per cent of the vote. She was chosen to stand again in the 2016 London Assembly elections but was deselected after her role in Pegida UK became public. Waters was also prevented from standing in Lewisham East at the 2017 general election after Ukip’s then-leader Nuttall publicly intervened.

The current favourite of the 11 candidates standing to succeed Nuttall is deputy leader Peter Whittle, with Waters in second. Some had hoped the party’s top brass would ban her from standing but last week its national executive approved her campaign.

Due to an expected low turnout, the leadership contest is unpredictable. Last November, Nuttall was elected with just 9,622 votes. More than 1,000 new members reportedly joined Ukip in a two-week period earlier this year, prompting fears of far-right entryism.

Mike Hookem MEP has resigned as Ukip’s deputy whip over Waters’ candidacy, saying he would not “turn a blind eye” to extremism. By contrast, chief whip, MEP Stuart Agnew, is a supporter and has likened her to Joan of Arc. Waters is also working closely on her campaign with Jack Buckby, a former BNP activist and one of the few candidates to run against Labour in the by-election for Jo Cox’s former seat of Batley and Spen. Robinson is another backer.

Peculiarly for someone running to be the leader of a party, Waters does not appear to relish public attention. “I’m not a limelight person,” she recently told the Times. “I don’t like being phoned all the time.”

The journalist Jamie Bartlett, who was invited to the initial launch of Pegida UK in Luton in 2015, said of Waters: “She failed to remember the date of the demo. Her head lolled, her words were slurred, and she appeared to almost fall asleep while Tommy [Robinson] was speaking. After 10 minutes it all ground to an uneasy halt.”

In an age when authenticity is everything, it would be a mistake to underestimate yet another unconventional politician. But perhaps British Muslims shouldn’t panic about Anne Marie Waters just yet.

James Bloodworth is editor of Left Foot Forward

This article first appeared in the 17 August 2017 issue of the New Statesman, Trump goes nuclear