Social Media and the Stock Market: A Lesson in Global Manipulation

social media and the stock market

By Kate Prince, {grow} Community Member

A hacker starts an online rumor about a place crash. The “news” goes viral and the airline’s stock plummets. The hacker makes a fortune on stock short sales that day and slinks back to his anonymous world undetected.

A company legally makes a material announcement on Facebook about an acquistion but the “reach” of the news on Facebook is so low only a few company insiders see it. They pounce on the news and buy low-priced shares before the market can respond and make millions in a day. Investors are furious and sue the company.

A large, national retailer uses Big Data to identify emotionally-troubled teens and targets them as a leading demographic for alcohol and cigarette sales. A disgruntled employee blogs about this and the company loses $500 million in market value overnight.

Think these stories are far-fetched? Read on.

Every day, some company’s hard-fought reputation unravels after a damaging revelation on Facebook, an ill-conceived tweet is seen by millions, or a shocking video goes viral. The power of the gatekeepers has shifted, the public’s attention span is shorter, and a company’s reputation could be at the mercy of every person with a smart phone.

Yet shockingly, the corporate and financial worlds have not yet grasped this aspect of social media.

It’s not through lack of trying, but rather due to the fact that social media is a rapidly evolving digital construct and companies are floundering in their ability to change due to slow-moving financial regulators, organizational lethargy, and out-dated legal guidelines.

What happens when a company’s social reputation is left in the hands of a social media platform that can actually influence the emotional state of over a billion people? What if those people were investors?

The Experiment

By now, most of are familiar with Facebook’s infamous experiment on nearly 700,000 of its users to ascertain whether there was a correlation between the positive or negative content in our News Feed and our emotional state.

Enough has been written about that. We now need to take this ethical question beyond the 700,000 Facebook user-guinea pigs and ask: How is Facebook consciously influencing their 1.38 billion users every day? How is Big Data being used to manipulate events and sentiments that can make or break a company?

The answer to this question has vast implications for public companies and their stockholders.

Social Media & the Stock Market

Social media poses an entirely new challenge for reputation management because the positive or negative sentiments previously shared by consumers, clients or investors with their personal networks is now amplified— beyond their control, beyond traditional media and beyond normal PR techniques. And as the public’s collective trust in the media fades, trust in information shared socially is on the rise.

A recent study by Nielsen found that 84% of consumers trust recommendations from family and friends more than any other forms of advertising. So we know that social media has a huge influence on buyer behavior in the consumer world, but how does that influence translate into the financial world?

In 2010, Australian airliner QANTAS first felt the brunt of social media’s inclination to trust “straight from the horse’s mouth” sources when a misinformed tweet about a plane crashing in Indonesia lead to false media reports and a huge drop in the company’s share price.

QANTAS Chief Executive Officer Alan Joyce told The World Today, “we first noticed a problem when our share price started to collapse, and that’s because of these reports coming out of Twitter.”

As the stock fell, the plane in question was still in the air.

Last year we witnessed one very extreme example of the impact social media can have on the entire financial market, when the Associated Press’ Twitter account was hacked, and a fake tweet was published that announced President Obama had been injured in an explosion at the White House.

Although the account was suspended and the information was corrected as quickly as possible, the immediate effect this misinformation had on the stock market was astounding. Over $130 billion in stock value was wiped off the market in a matter of seconds, the S&P500 declined 0.9%, and high frequency trading algorithms wreaked havoc.

Financial Platforms Wake Up

Regulatory investigators began looking into how financial markets and the companies listed on them can manage the proliferation of price sensitive information shared on social media and the impact this has on company value.

In Australia, the Australian Stock Exchange (ASX) declared that companies were now “legally obliged to monitor social media and disclose anything relevant to the market.” This was the first step for the financial platform in its attempt to tame the social media beast.

The United States took the next step. The Securities Exchange Commission (SEC) changed the rules that determine what platforms companies can use to communicate with investors — widening the regulations to include Facebook and Twitter — so long as the companies made their investors aware of the outlets they intended to use.

If companies happen to use language in their communications that is deemed positive or negative during such an occasion, does that impact how widespread their message is disseminated?

This is compounded by the fact that due to the already restrictive algorithms and the plethora of content in the News Feed daily, many Facebook pages’ organic reach is down to only 6.15% in February 2014 (If you have 1000 ‘Likes’, your posts will only make it into the News Feeds of 61 users).

Is that fair to everyone? Couldn’t a company actually make an announcement on Facebook (complying with the SEC) but in reality “hide” the information because the organic reach is so low?

Markets Impacted by Emotion

Legal scholar Ryan Carlo warned that we are vulnerable to “digital market manipulation” — when companies use Big Data about a consumer’s background and emotional state to coerce them into purchasing goods they don’t need, or paying more than they should. But the issue at hand is that companies are now just as vulnerable to being cut off from consumers, or becoming the victim of negative market sentiment artificially driven by the platform they’re operating on.

A recent survey in the United Kingdom by Finextra Research has shown that 62% of brokers and heads of trading desks believe social media sentiment influences share prices.

This was investigated more thoroughly in 2010 by Cornell, who published their findings in the Journal of Computational Science—”Twitter mood predicts the stock market.” The research looked at whether societies at large can experience mood states that affect their collective decision-making. The study notes that:

“We know from psychological research that emotions, in addition to information, play an significant role in human decision-making. Behavioral finance has provided further proof that financial decisions are significantly driven by emotion and mood… It is therefore reasonable to assume that the public mood and sentiment can drive stock market values as much as the news.”

They weren’t wrong in that assumption—their results showed that certain public mood aspects could predict the daily up and down changes in the closing values of the Dow Jones Industrial Average with an accuracy of 87.6%.

A data team from the University of California took it one step further and created a computer model that “predicts the future of the stock market” by scanning public sentiment indicators on Twitter. The software was up to 11% more accurate than other models at predicting both the volume of trading and the value of stock the next day.

Though financial regulators are finally recognizing social media as a true player, the revelations coming out of Facebook’s emotional manipulations have changed the conversation. The financial regulators — the SEC in particular — need to decide whether they are comfortable blindly allowing Facebook to be so influential on the market while  keeping their algorithms private.

Taking that question to Twitter is of secondary concern, as the platform is fundamentally different; on Twitter, what you sign up for is what you get, their stream is unfiltered. Not only is Facebook designing the algorithms that decide what users see or don’t see, they’re also manipulating the News Feed for supplementary purposes, and have the potential to influence markets in this way, including the one that they are listed on.

The Ethical Concern

The critical issue for companies whose value is intrinsically linked to their public reputation is not knowing how Facebook plans to use this proven capability of emotional influence in the future. A Facebook researcher, Dr J Fowler, told CNN “If we want to make the world a better place on a massive scale, we should focus not just on changing a person’s behavior, but also utilizing the network to influence that person’s friends.”

It should be a serious concern to all Facebook users that we are so easily manipulated; as Jacob Silverman, author of Terms of Service: Social Media, Surveillance, and the Price of Constant Connection, told Wire Magazine, “as long as the platform remains such an important gatekeeper—and their algorithms utterly opaque—we should be wary about the amount of power and trust we delegate to it.”

Companies that are financially vulnerable to the whims of the public’s perception should be even more so.

I would welcome your observations and ideas about this topic in the comment section.

Kate Prince
Kate Prince is a financial communications consultant from Sydney, Australia. Kate specializes in assisting listed and unlisted companies develop strategies and manage issues across social media. Follow @kate_prince on Twitter.

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  • Excellent article Kate, thank you for the insights. On a macro level this should help disperse any remaining notion among corporate execs that social media is ‘fluffy stuff’. For those that don’t, well, natural selection in the marketplace awaits.
    On a micro level I love how you’ve put a spotlight on specific issues that are actionable for those at risk and those responsible for oversight.
    I’m sure there’s much more to this but great job cracking the door to give us an eye-opening peek.

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  • Doug Bedell

    Wow, what a great post! Takes us right to the border between pre-digital and digital times. Sobering indeed.

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  • Kate Prince

    Thanks Craig – it’s definitely time Execs stopped thinking of Social as a “phase”!

    I’m looking forward to seeing what further changes the markets make in the coming months/years, as there is a huge need for it.

  • Kate Prince

    Thanks Doug – that border is very grey at the moment where financial markets are concerned!

  • Great post Kate, one of the most interesting and informative I’ve read in ages!
    It goes to show how ignorant many execs STILL are about social media, even after all this time.
    Finally, the Facebook issue is a serious ethical concern to my mind – if I didn’t ‘need’ it for business purposes I’d be tempted to close my account!

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  • Jeff Reed

    Great, relevant post Kate. Focusing on a top-down approach to curbing this problem may seem to most people the obvious choice going forward. However, a bottom-up approach can help individuals avoid a negative impact to their personal financial situation. “Verify, Verify, Verify” should be their motto before buying or selling an investment based on UNVERIFIED information. A social media post isn’t really that different from a whispered tip at the local Chamber of Commerce meeting is it? Of course the reach of that type of “whisper” is greater, However, just because it is a 140 character, typed “whisper” shouldn’t give it anymore credibility. As a financial advisor, I often to function in the role as a “hired skeptic” for my clients. If they demand to trade X, I ask them why; then go through a due diligence process to determine if that is a prudent move for them. If you eliminate the “I want it now”, knee-jerk reaction of some people you can often protect them from themselves.

  • Great thinking Kate. It’s nice to see real life examples that absolutely prove the facts. You’re absolutely right in saying executives need to realize Social Media is not a ‘phase’. More importantly, IMO they need to realize, as your examples show, this is just the beginning. Some say ‘Social Media’ has matured. These examples prove that we are still in the very early days and what is coming is far more pervasive and powerful than most of us can imagine!

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  • Hi Kate, this is a fantastic article. I don’t think anyone should underestimate just how much power social media actually has! Some of your examples clearly highlight how many social media users hold the mentality that ‘if it’s on Facebook it is true’ which of course we know is not the case. One thing is sure, social media is here to stay and everyone in the world of business needs to learn how best to take advantage of that.

  • As the others have said, this is a really great article. Do you have additional comments to make since twitter announced we’ll now be seeing tweets in our timeline from people we don’t follow? –

  • Kate Prince

    I’m definitely not a fan of the new feature from Twitter – I already miss enough of the tweets I actually want to see due to slowly following more and more people, to think that now this will also have to compete with Tweets I didn’t sign up for is frustrating, but I guess that’s life if we choose to use the platform for free… I think some sort of subscription service wouldn’t have been the end of the world for them – even $0.99c/month would be easier to stomach than losing the integrity of an unfiltered service.
    In terms of the effects discussed above, I don’t think it will impact the influence of listed companies in the same way Facebook has because Twitter is using it predominantly as an advertising function, and they’re not stopping any users from seeing content they’ve elected to see – so the principle is different. It would be a different story if we started seeing promoted tweets or unrelated tweets subbed into the twitter stream in place of the tweets from those we actually follow… time will tell if they go that far for the money!

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