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.

Photo: Getty
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Cambridge Analytica and the digital war in Africa

Across the continent, UK expertise is being deployed online to sway elections and target dissidents.

Cambridge Analytica, the British political consultancy caught up in a huge scandal over its use of Facebook data, has boasted that they ran the successful campaigns of President Uhuru Kenyatta in the 2013 and 2017 Kenyan elections. In a secretly filmed video, Mark Turnbull, a managing director for Cambridge Analytica and sister company SCL Elections, told a Channel 4 News’ undercover investigative reporting team that his firm secretly stage-managed Kenyatta’s hotly contested campaigns.

“We have rebranded the entire party twice, written the manifesto, done research, analysis, messaging. I think we wrote all the speeches and we staged the whole thing – so just about every element of this candidate,” Turnbull said of his firm’s work for Kenyatta’s party.

Cambridge Analytica boasts of manipulating voters’ deepest fears and worries. Last year’s Kenyan election was dogged by vicious online propaganda targeting opposition leader Raila Odinga, with images and films playing on people’s concerns about everything from terrorism to spiralling disease. No-one knows who produced the material. Cambridge Analytica denies involvement with these toxic videos – a claim that is hard to square with the company’s boast that they “staged the whole thing.” 

In any event, Kenyatta came to power in 2013 and won a second and final term last August, defeating Odinga by 1.4 million votes.

The work of this British company is only the tip of the iceberg. Another company, the public relations firm, Bell Pottinger, has apologised for stirring up racial hostility in South Africa on behalf of former President Jacob Zuma’s alleged financiers – the Gupta family. Bell Pottinger has since gone out of business.

Some electoral manipulation has been home grown. During the 2016 South African municipal elections the African National Congress established its own media manipulations operation.

Called the “war room” it was the ANC’s own “black ops” centre. The operation ranged from producing fake posters, apparently on behalf of opposition parties, to establishing 200 fake social media “influencers”. The team launched a news site, The New South African, which claimed to be a “platform for new voices offering a different perspective of South Africa”. The propaganda branded opposition parties as vehicles for the rich and not caring for the poor.

While the ANC denied any involvement, the matter became public when the public relations consultant hired by the party went to court for the non-payment of her bill. Among the court papers was an agreement between the claimant and the ANC general manager, Ignatius Jacobs. According to the email, the war room “will require input from the GM [ANC general manager Jacobs] and Cde Nkadimeng [an ANC linked businessman] on a daily basis. The ANC must appoint a political champion who has access to approval, as this is one of the key objectives of the war room.”

Such home-grown digital dirty wars appear to be the exception, rather than the rule, in the rest of Africa. Most activities are run by foreign firms.

Ethiopia, which is now in a political ferment, has turned to an Israeli software company to attack opponents of the government. A Canadian research group, Citizens Lab, reported that Ethiopian dissidents in the US, UK, and other countries were targeted with emails containing sophisticated commercial spyware posing as Adobe Flash updates and PDF plugins.

Citizens Lab says it identified the spyware as a product known as “PC Surveillance System (PSS)”. This is a described as a “commercial spyware product offered by Cyberbit —  an Israel-based cyber security company— and marketed to intelligence and law enforcement agencies.”

This is not the first time Ethiopia has been accused of turning to foreign companies for its cyber-operations. According to Human Rights Watch, this is at least the third spyware vendor that Ethiopia has used to target dissidents, journalists and activists since 2013.

Much of the early surveillance work was reportedly carried out by the Chinese telecom giant, ZTE. More recently it has turned for more advanced surveillance technology from British, German and Italian companies. “Ethiopia appears to have acquired and used United Kingdom and Germany-based Gamma International’s FinFisher and Italy-based Hacking Team’s Remote Control System,” wrote Human Rights Watch in 2014.

Britain’s international development ministry – DFID – boasts that it not only supports good governance but provides funding to back it up. In 2017 the good governance programme had £20 million at its disposal, with an aim is to “help countries as they carry out political and economic reforms.” Perhaps the government should direct some of this funding to investigate just what British companies are up to in Africa, and the wider developing world.

Martin Plaut is a fellow at the Institute of Commonwealth Studies, University of London. He is the author of Understanding Eritrea and, with Paul Holden, the author of Who Rules South Africa?