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The Social Market

May 28th, 2013

By Matthew Petersen

All it took was 140 characters to negatively influence the financial markets.  The brief free-fall in the US market last month has solidified social networking’s presence as an influential, professional media. Social media has the capacity for truly unfiltered information flow- through without oversight from an editor, which can create credibility issues. Creditable news sources, such as the Associated Press, have standards to uphold, but the speed and influence their social media presence possesses, places a target on their backs from cyber-terrorists wanting to do harm.

 

The social networking site Twitter provides a social network for members to post small amounts of information ranging from links to websites to short messages to “followers”. Most messages or tweets are as short as this sentence with a maximum character count of 140 including spaces (this sentence is 135).  On April 23rd at 1pm (EST), this tweet went out from the Associated Press Twitter account:

The financial markets quickly reacted:

The Dow Jones (figure 1) went from a 1% intra-day gain to a 1% loss after the tweet went out; the S&P 500 (figure 2) also experienced a 1% drop.  The news was quickly corrected and deemed false. The AP’s Twitter account had been hacked. After the tweet was deemed false, the markets quickly recovered. All of this volatility occurred in a matter of minutes.  This isn’t the first time social media has moved the markets. In February, Apple was the subject of social media misinformation:

 

In late February, before Apple Inc.’s shareholder meeting, an influential stock picker sent out a tweet suggesting that Apple was about to split its stock. Apple was on a slide, but the tweet helped reverse the trend. It added 1.2% before investors realized the information was bogus. (David Weidner, “How a ‘Harlem Shake’ shook Wall Street” 4/30/13)[i]

 

In fact, the S.E.C. ruled recently to approve the use of social media as a means to release company related news[ii]. The ruling was in response to a December event regarding Netflix’s chief executive Reed Hastings, who posted information about viewership numbers to his Facebook wall. The use of social media to disseminate information is ever increasing, and the use of technology to analyze and trade on the information coming out of social media is playing a very crucial role throughout financial markets. Most of the market movement in figures 1 and 2 is not from human initiated sales, but from complex algorithms that scan news and social media for influential information to trade on. Technology can make mistakes, and large swings can occur based on hacking (the AP tweet) or glitches, like the one that occurred recently with the Chicago Board Options Exchange, which closed for a few hours the same week due to a glitch. With technology playing such an influential role throughout the world financial markets, ranging from operation to even volatility, below are a couple questions a long-term investor should ask him or herself for reassurance:

 

Have the financial markets corrected themselves once this information is corrected and/or the glitches are fixed? Yes.

 

Have large intra-day or weekly swings in the market prevented a historically positive producing market? No.

 

Beliefs and confidence are not tested and validated in times of certainty, but in times of uncertainty. Markets will move and daily movement can make your heart jump, but remember that markets are overall efficient, they correct themselves, and you are focused on long-term goals. If that still isn’t comforting, your trusted Petersen Hastings wealth advisor is available and happy to help.

 

 

[i] http://www.marketwatch.com/story/how-a-harlem-shake-shook-wall-street-2013-04-30

 

[ii] http://dealbook.nytimes.com/2013/04/02/s-e-c-clears-social-media-for-corporate-announcements/

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