Rumors on the Internet: Instantaneous Profits and Losses
26/04/2013 | FxM – Nacho Sainz-Ezquerra
Do rumors on the internet affect financial markets? There are several studies that show the implications that phrases, thoughts, moods, etc. posted on social networks have on the market. A clear example of this comes from University of Indiana Professor Johan Bollen. He concluded in his study “Twitter mood predicts the stock market” that mood swings on Twitter coincide with the variations of the Dow Jones Industrial Average; three or four days afterwards. That means if people are happy, the index goes up, and it drops if the mood turns blue. Ultimately, Twitter is the “crystal ball” of the Dow Jones. On April 23rd, 2013 something occurred that has happened many times before: a rumor on the Web, in this case a false Tweet on the Associated Press´s account, caused chaos on Wall Street. The Tweet came from a group called the “Syrian Electronic Army” and said the following: “Breaking: Two Explosions in the White House and Barak Obama is injured”. Seconds later, the Dow Jones had lost all its gains for the day. There are many cases, some good and some bad, in which rumors have made the markets rise and fall. Here are some examples, set forth chronologically. In April, 2004 a rumor about former FED Chairman Alan Greenspan´s health made the markets drop. In 2007, two businesses –Engadget and Apple– were the protagonists. An employee and blogger for Engadget received a tip that said there was going to be a delay in some of Apple´s projects. The news spread like wildfire. Apple´s stock fell 3%, which meant a loss of 4 billion dollars. Shortly thereafter, the rumor was found to be false. The same year, the contrary occurred in Spain. There were rumor that the pharmaceutical company Novartis was going to carry out a hostile take-over of the Spanish pharmaceutical company Zeltia. In just a few hours, Novartis´ shares had gone up 15%. Later, when Zeltia denied the operation, Novartis´ shares went back down to their normal value. In October of 2011, discrepancies on when a European Summit was to be held and whether or not to increase the European bailout fund made the many European stock markets drop, notable the IBEX-35 by 2.73%. The following year, U.S. markets were back in the center of attention. The shares of the Kodak dropped 30% on the NYSE in one day. Why? Because the Wall Street Journal had said Kodak was going into bankruptcy. Another example comes from the oil company Repsol. In January, 2013 the value of its stocks fell 2.3%, even up to 3% at one time, because of rumor around the fact that Argentine President Cristina Fernández was going to nationalize the oil company YPR, of which Repsol has 58% ownership. On March 21st, 2013, there were rumors abound that Cyprus was going to exit the euro, which caused severe market turmoil. Rumors don´t just play a role in the stock market but also in our everyday economic lives as well. In March of 2013, a simple rumor in Tenerife (Canary Islands) caused chaos at the ATM machines of the Caja Canarias Savings Institution. The bank alerted its clients that, during a few hours, the money they took out of cash machines would not show up on their accounts. Some posts on social networks did not pick up on all the facts and many people believed that if they took money out from the cash machine, the operation would not be reflected on their account balance – something which did not occur. Long lines formed with the hope that this would turn out to be like the Monopoly Community Chest card: “Bank error in your favor.” Nowadays there are Tweets, but before there were SMSs and the phrase “pass it on”. So, are we seeing a new way to attack the competition? Or could this be a strategy by traders and brokers? How many rumors have we heard that aren´t true? Do we let ourselves get influenced too much but what we read, hear and see? It´s absolutely necessary to be able to compare and contrast the information we are constantly receiving, especially when it comes to our money because we can trust it to just anyone. Normally, due to laziness, a lack of personal initiative and a lack of vision, we don´t contrast the information. We must be sufficiently conscious enough to be able to take in to account the risks that are inherent in our actions, and we have to think about if we trust all the information we find on the Web.