An old maxim among traders on the stock exchange says “buy on rumours, and sell when on news.” In practical terms, this means that when there is a rumour that a company’s value will shoot up, speculators should not wait to corroborate it but instead should rush to purchase stocks in the hope that the rumour proves to be true.
When it does, investors will rush to follow suit, at which point it will be time to sell because the value of the stocks will have gone up in the wake of the increased demand. This is not insider trading, however. The traders have no concrete way of confirming the rumour, apart from the facts available to them and their intuition that tells them whether or not to pursue it. If they buy stocks on the basis of a rumour, they could still risk a loss.
US economist Markus Brunnermeier published a study that referred to a petroleum services company in 2001 that had sustained major losses in 1993. But before the news of this officially came out, some speculators heard rumours that led them to start selling early before the price of the company’s shares plummeted. When this happened, they bought the shares back again, in other words, profiting twice. They made a profit when they sold the shares ahead of the crowd, and then they did so again when the share price hit rock bottom, drawing on their awareness that the market tends to overreact and that the lower value did not reflect the real value of the shares.
The study made a number of important recommendations in support of legislative and regulatory efforts to tighten restrictions on circulating insider information about companies listed on the stock exchange and to increase the penalties for the exploitation of this information for personal gain, given the dangerous impact it could have on the economy and investor rights.
A US Federal Reserve study published in 2011 on the effects of rumours and misinformation on stock prices related that an old news item about the American airline United Airlines filing for bankruptcy began to circulate on the Internet in 2008, precipitating a more than 75 per cent plunge in its share price in a matter of minutes. After the New York Nasdaq exchange briefly suspended trading in the shares and made an announcement refuting the rumour, the airline’s stock rallied, but only by 11 per cent by the end of the day. The quoted value of the shares continued to lag behind their real value for some time, due to the ongoing effect of a rumour that had been deliberately spread in order to drive the company’s share price down.
The law can prevent the exploitation of insider information before it becomes available to the public through properly transparent channels. But it is essentially helpless in the face of rumours, even if the regulatory authorities and officials concerned with publicly traded stocks do everything possible to counter rumours through the release of accurate information in accordance with accepted rules of disclosure and transparency.
Not much can be done to stop a rumour once it starts to spread, and often its content is outside of the companies’ or the authorities’ control, including rumours about changes in tax rates, exchange rates, customs fees or political developments that could affect a company’s shares. As a result, it is not just officials or regulators who are responsible for establishing the facts, but all those involved in public affairs. Meanwhile, there is a lot of work that needs to be done in order to establish a more perfect system of transparency, accuracy, completeness and availability of information, always assuming that this will be used effectively. In its absence, rumours will continue to circulate and spread, achieving gains for the rumour-mongers and losses for their victims.
As much as we might boast of living in the Information Age, with digital platforms flooding us with information at inconceivable speeds and in incredible quantities, and as much as fact-checking, information analysis and data-auditing agencies might compete to verify and publish accurate information, rumours continue to proliferate, often disguised as facts. They are disseminated by people with vested interests, circulate among friends and peers, and acquire vast momentum through social media platforms.
Some examples of the effects of rumours on the stock exchange, investment and the economy in general are given above. But all rumours have always shared a certain quality: they contain something that the receiver is prepared to believe. That something could inspire hope or warn of an impending ill, yet the general intention behind its release is to mislead and distract. In cases of competition and conflict, rumours can be used as weapons to harm opponents. Indeed, they are often among the deadliest weapons in conflict situations, as they can be used to sow chaos in the enemy’s ranks.
The former director of the Stanford University Centre for Cyber Policy in the US, Kelly Born, has noted that some countries have introduced legislation to stiffen penalties on companies and information platforms that fail to remove misleading or illegal content from their sites within 24 hours, and that fines can reach as high as $60 million in the case of hate speech and incitement to violence. However, she also listed six obstacles hampering the efficacy of controls to prevent the spread of misinformation or the abuse of information harmful to society and the economy.
The first is the diversity of potential sources of information, regardless of its accuracy and credibility. Anyone with a social networking account and a reasonable number of followers can disseminate information that, even if it has benefits, is not subject to fact-checking, editorial review or other procedures and standards that the established media works by.
Second, it now costs virtually nothing to transmit news, whether true or false, to audiences, unlike the situation in the pre-digital age when news and information was first scrutinised to ensure it was fit to print or broadcast.
Third, sources themselves have often today become the objects of suspicion, and it is often difficult to tell the professional and credible from those who only pretend to be so, let alone those having ulterior or malicious motives. According to a study by the American Media Institute, an investigative service dedicated to public accountability, the original source of a news article may now be less important to readers than who in their network shared the link. For all such readers know, the original author of the article might be a mad conspiracy theorist of the sort that are to be found in abundance these days.
The fourth obstacle is the frequent anonymity of the source or distributor of the information. The fifth is the speed with which information can not only be transmitted but also individually tailored to target audiences using various technologies to discover likes, dislikes, interests and other personal details. Such practices both affect the target audiences’ behaviour and make them more vulnerable to misleading information.
The last problem that Born identifies lies in the very media used to circulate information in the digital age.
Social networking platforms are not subject to any form of self-regulation, such as the codes of professional ethics that set the standards for the more traditional print, radio and television media. The US had tried for years to establish an agreed-upon set of standards to ensure the transparency of campaign ads and how they are paid for, but without success.
In an article published in 2017, journalist Gillian Tett of the UK Financial Times said that if the readers of a respectable newspaper like hers were asked whether they could tell the difference between real news and fake news, they would almost inevitably answer that they could. However, a study conducted by the New York University Research Centre in the US has revealed that while the participants showed a good ability to discern real news, their ability to identify fake news was not very good at all.
It appears that not that much has changed in our Information Age from the pre-digital age when accurate information was not that easy to come by. If one wants to arrive at the truth and sort it out from lies, rumours and distortions, then it is necessary to make an effort and use one’s mind. The unceasing efforts made by many to make verified information available to people directly from its sources are helpful here. They may often entail simplifying the information for more general audiences and – why not? – relating it or packaging it in attractive ways that enable it to rival rumours and fake news.
For the sake of a little exercise in discerning facts from misinformation, I’ll leave readers with the following 'simple’ questions:
- Is there truly a pandemic going on that has caused millions around the world to die, or is that just fake news?
- Is the Covid-19 vaccine more harmful than the virus itself?
- Does climate change really pose an existential threat to mankind and the future of the planet?
An Arabic version of this article appeared on Wednesday in Asharq Al-Awsat.
*A version of this article appears in print in the 29 July, 2021 edition of Al-Ahram Weekly.