The news media have been abuzz for a few weeks about the proliferation and effect of fake news. Facebook is changing how it handles news from dubious sources, while Twitter is rethinking how to respond to bots promoting fabricated articles. Alphabet (Google) has rejiggered its algorithms to fight phony stories.
All of which raises some very interesting questions for investors and traders. It’s worth remembering that financial markets have been dealing with hoaxes, frauds and fake news for a long time. The wrong response can be costly.
Back in the bad old days, faxes and message boards were used to defraud investors. Recall what happened to Emulex after a news release that was sent out over a business news wire — its stock plunged 60 percent. PairGain Technologies, Lucent and other companies were also victims of fake releases posted on message boards. The list goes on and on: Avon Products, Rocky Mountain Chocolate Factory, Tower Group International, Sina, Local, Javelin Pharmaceuticals and General Mills were targets of similar scams. Last year, Twitter’s price spiked after an article from a hoax domain that looked like a Bloomberg News site trumpeted a phony $31 billion takeover offer.
The manipulation of stock prices with false news stories has a long and ignoble history. Consider the trial of Lord Cochrane as recounted in the “Quarterly Journal of Jurisprudence: Volumes 9-10” (Jan. 1, 1860):
“About midnight, on the 21st February, 1814, a person calling himself “Colonel du Bourg, aide-de-camp to Lord Cathcart,” presented himself at the ship hotel at Dover. He represented that he had just arrived from Calais by a French smack-that he was the bearer of important intelligence from Paris, to the effect that Buonaparte had been killed by the Cossacks-that the Allied armies were in full March for Paris and that immediate peace was certain.”
Confederates of du Bourg “dressed as French officers distributed leaflets in London announcing that Napoleon had been killed.” Rumors of Napoleon’s demise had been spread before, but a willing public was easily duped when told what it wanted to hear.
Not surprisingly, as reports of Napoleon’s death spread through London, British government securities on the stock exchange soared. But someone at the exchange noticed 1.1 million pounds in government-based stocks was being quietly sold. An investigation revealed that du Bourg was not a colonel — he was really one Charles Random de Berenger. He was convicted, as were other parties to the fraud. They all served jail time.
Time magazine labeled the Great Stock Exchange Fraud of 1814 one of top 10 hoaxes of all time. All of which is a long-winded way to say that fake news has been with us for a very long time and is likely to be with us for the foreseeable future.
It doesn’t require a faux colonel to move markets or stocks today. Algorithms are harvesting social media sites such as Facebook and Twitter to drive new types of hedge fund. Some are looking for changes in sentiment to make macro bets; others are looking for company-specific information. But can they continue to generate profits if fake stock news begins to compete with real? A new arms race is likely already underway between algos separating real news from fake as they trawl the social networks looking for intelligence.
If we are lucky, these quant funds might find it profitable to lease these fraud-finding algos to Facebook, Twitter and Google (unless it’s more profitable for them to keep the code to themselves).
Long-term investors have a different issue with noise. It isn’t the news — real or fake — that’s the problem; rather, it is their reaction to it. People with long investment horizons should learn to not react to the short-term stuff. If you are truly thinking in terms of years and decades, than does the next economic-data report (or anything else) really mean much to your portfolios?
Investors need to distinguish between the empty calories — gossip, rumors, idle speculation — and instead, focus on what is genuinely useful. Fake news may be foolish, but your reaction to it doesn’t have to be.
– Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
(c) 2016, Bloomberg View · Barry Ritholtz
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One Response
There are 2 separate groups, fake news and un-fake news.
The fake news are what is known as the traditional sources who were pushing opinion in favor of the democrats (but the democrats cheated in the debates by getting the questions leaked to them before the debate -so were prepared with answers that looked slick, and did other things like the paid demonstrators etc etc)
and the un-fake news who really show the truth about the election and the way it was managed” by the democrats. But the fake news are still calling the un-fake news fake! What a disgusting coup!
The un-fake news is on youtube, and facebook is trying to delete the un-fake news which they are calling fake.
Also, youtube is threatening to censor un-fake news and called it fake when in fact it is true. Don’t believe all you hear.
Un-fake news has a huge following on youtube, millions, bigger than the fake news on the traditional news sources.