How even a ridiculous, fake tweet can move stocks these days

Monday, 18-August-2014

It was only until recently that if you were not based in New York, you were at a huge disadvantage as an investor.  New York, of course, is the capital of finance, and that is where almost all market making news used to land first.  As someone who invests from afar, I cannot tell you how frustrating that felt at times.  For example, to see a stock suddenly jump on your screen for unknown reasons, but to have almost no means to make an informed decision about what was going on used to be a daily occurrence.  To add even more to the frustration, a lot of times those things were the result of a bogus rumor.  Only those in certain circles heard about them, and therefore had any hope of making sense of a fast moving stock.

 

While that type of inside baseball still happens today, for the most part the emergence of technology has turned the equation on its head.  By far the biggest thing that has not only leveled the playing field, but also actually delivered the advantage to the individual investor is Twitter.  It has become the most likely place for news to break, and if you are not all over it, you are gravely missing out.  That goes for companies too.  While many corporate leaders are beginning to understand the significance of the medium, some still view Twitter as merely a curiosity.  They have no idea how powerful its ability is to affect their company and its stock price.  My recommendation to those people is that they figure it out fast.

 

However, what you need to know does not just end with Twitter alone.  Understanding its role is only the first dimension of a very odd, and complicated, twilight zone that we now call the stock market.  Add things like news reading bots, algorithmic and high frequency trading, and the widespread use of leveraged instruments like options and futures into the mix, and you have one explosive environment.  Investors and corporate leaders both need to be aware of all of those things because they sometimes enable small blips to turn into big events.  While this might seem a little daunting at first, as you will see, the good news is that everyone now has the tools to stay on top of it.   I will illustrate this through something that happened last week.

 

Deceptive tweet moves Intercept stock

 

The confluence of everything that is odd about our markets lately is exemplified by the below tweet that happened on Thursday:

 

An explosive comment for sure, but should it, or could it actually move markets?  Let’s first look a little deeper into who this person is, and what his relevance is to the market. 

 

No offense to Mr. Fraser (if that is a real name), but he is not exactly a heavy hitter like Warren Buffett, or a widely followed financial pundit.  A further look at Fraser’s Twitter account shows that he only has a little over 140 followers at the time of this story.  

Given that, you would think anything he blurts out loud on Twitter would not have much of an impact (or at least be viewed with skepticism), right?  Wrong.  Below is an intraday chart of how the stock he mentioned, Intercept Pharmaceuticals (Nasdaq: ICPT), traded on Thursday.  Look at the reaction after his tweet.  The stock went up over $8 on a spike in volume, which equates to an increase of roughly over $160 million in market value. 

While this move is actually small potatoes in the grand scheme of Intercept’s $6+ billion market cap, shouldn’t we at least be a little concerned that such a small, and clearly ridiculous tweet could have an impact at all?  I think we should. 

 

You might remember that something like this happened on a much larger scale in April of 2013 when a fake tweet about explosions at the White House moved the entire market.  As our Intercept example shows, clearly not much has changed since then about the ability of these things to affect stocks.  Your guess is as good as mine if the SEC is even looking at the issue.  That is why as an investor, or as a company following your own stock, you need to understand this dynamic well since it might be a sign of the times that we just have to live with.

 

The question is: how is it happening?  The answer lies in a combination of news reading bots and algorithmic trading.  I kid you not.

 

News reading bot can set off a chain reaction

 

As you might already know, an entire shadow market full of computer generated programs are constantly out there looking for stock-relevant news with the hopes of trading on it before humans can physically intervene.  The most prevalent example of this happens during earnings and other general corporate news announcements.  In the milliseconds before humans can even click on a link to read a press release, computers have already read it, tried to decipher what it means, and traded off of it.  They are not always right, but they absolutely are always first.

 

Social media is no different.  Since so much news happens these days in real time and outside the confines of general company releases, many of these computer programs also scour social media looking for information that might move stocks.  In fact, a few investment funds are even entirely based on computer-generated strategies like this.  It might not seem overly concerning on the surface, but a problem arises from the fact that this system is only as strong as its weakest participant.  While the programs vary in sophistication, it only takes one to be gullible enough to fall for fake news and set off a chain reaction that moves stocks. 

 

That’s because there is a whole other set of algorithmic programs that can exacerbate the problem after an initial move.  This second set of computer programs could care less why a stock is moving.  They only care that it is moving.  Feeding off of the stock’s perceived momentum like this only magnifies it further.  That is how one computer that incorrectly analyzes information from something like a tweet can set off a vicious chain reaction.  This second set of computers sees the move, assumes something is up, and bids the stock up even more.  That type of frenzy is more than likely what moved Intercept on Thursday.  Let’s take a closer look at it specifically.

 

Why computers more than likely moved Intercept

 

In the case of Fraser’s tweet, there are a few obvious tip-offs that most human beings would recognize as a fake (or at least make you realize that it is based on heavy conjecture).  First, as we have already discussed above, the source, while maybe a nice guy, is not exactly Edward R. Murrow.  Second, there is no link to a legitimate news article.  The statement is purely a wild opinion.  Third, the amount of the so-called transaction, $20 billion, pushes the limit of being outright obscene.  A deal of that size would surpass what Gilead (Nasdaq: GILD) paid for Pharmasset as the ultimate jaw dropper.  Given how ridiculous all of these things are by themselves, let alone in totality, it is almost certain that the trader who was duped by it was a computer.

 

This tweet was so obviously fake that I assume even 99% of computer programs probably recognize it as being nonsense.  However, again the problem is that it only takes one to set off a chain reaction. 

 

I am guessing in this case that the program that actually traded off of it was fooled by the fact that @BloombergNews was mentioned.  Noticed how Bloomberg was not even referenced as a source, but only mentioned.  Including the name of a real news organization or investment fund in a tweet is a common method the manipulators use to confuse these programs.  The White House incident from last year similarly mentioned the AP.  When these programs see a legitimate source mentioned in the same breath as some type of news, some less sophisticated ones are not able to properly determine the credence.  I would guess that is what happened here.

 

Then, once the first program was fooled and bought some stock, the stage is set for the snowball effect to kick in.  The type of purchase order a computer program like that would most likely use to buy the stock is a ‘market’ order, meaning they do not set an upper limit for what they will pay.  They just want a lot of stock as quickly as possible.  Think of ‘market’ orders as chum in the water for algorithmic sharks, the second set of computer traders I described above.  I’m sure a few of them saw the buy, thought something was up, and decided to join the party by also purchasing Intercept stock.  Then, the extra volume from those purchases catches even more attention, and so on, and so on…until human beings are alerted and finally step in to figure out what is going on.  However, until that happens, the stock can move quite a bit, as it did in this case.  $160 million in market value is no laughing matter.

 

What are the takeaways from this problem?

 

For better or worse, this is the lay of the land currently.  Now that you hopefully have a better understanding of it, where does that leave us?  Below are a few takeaways that I try to keep in mind as I watch the markets on a daily basis.  You might think about them too the next time you see a stock you trade, or your own company’s stock, make an unexpected move.

 

  • Stocks do not always move based on the ordinary supply and demand of legitimate market factors.  There are many things these days that can move a stock’s price that have nothing to do with the actual fundamentals of a business.  These include computer-generated strategies that are faster than humans, but also sometimes lack basic common sense judgment.  Do not trade a stock unless you know exactly why it is moving.

 

  • Market moving news comes from anywhere these days.  While it used to be that most financial information, including market rumors, mostly originated in New York, technology has made it possible for anyone to make news from anywhere.  As is always the case, this comes with both positives and negatives.  If you follow finance, do not ignore the periphery.

 

  • Whether you are an investor, or a company following your own stock, you MUST be on Twitter.  Not only is it the place where most news (and rumors) break these days, but nowhere else is news more efficiently sniffed out, vetted, and discussed than it is there.  That is actually the good side of this story about fake tweets.  While they do originate on Twitter, they also get exposed there faster than anywhere else.  For example, in a few short minutes after the Intercept tweet was up and moving the stock, many credible sources were already publicly shooting it down. 

Kudos especially to @biorunup for being the first person on it.  As you can see, one of the great things about Twitter is that it is self-policing.  That is one thing that distinguishes it in a good way from how rumors used to travel.  In the past, only those in certain circles heard about them, and you were toast if you were not in the know.  While rumors and manipulation are not good, at least now almost everybody has at their fingertips the ability to hear them and make their own judgments.  Before technology like Twitter helped level the playing field, too many people were kept in the dark.

 

  • There are now many artificial components to our markets like algorithmic and high frequency trading that likely serve no general benefit, yet come with significant dangers.  All they seem to do is turn the digital trading floor into a circus.  Furthermore, the SEC and other regulators do not seem able or willing to do anything about this.  Traders should be concerned for obvious reasons, but corporate leaders should be too.  If incidents like this happen to your company’s stock, that means a) it is probably not trading based on its fundamental value at times and b) investors might want to move on to other stocks that are not as affected by such nonsense.  Both of those are actually pretty serious and can affect your business.  I spoke to one CEO who had something similar to this happen to his stock once, and he said it was a legitimate distraction.  These market structure issues will not change unless corporate leaders address concerns about them directly to the exchanges and regulators.  Both investors and companies should be aware and concerned about this.

 

To conclude, many of you already might have known about these things, but I am guessing they are not so obvious to others.  I hope this example has helped shine a light on some of the new dynamics you have to think about when looking at our markets today.

Who Am I?

I'm an individual investor from Kansas City.  My focus is on biotech stocks, but I enjoy investing in all industries. I'm an old-school, buy and hold investor who believes the best way to outperform and grow capital is to own innovative companies with good management teams over the long-term. more>>

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