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How fake news can warp financial markets

Glenn Freeman  |  29 Dec 2016Text size  Decrease  Increase  |  

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Recent reports of fake news highlight the importance of relying on trusted, impartial and expert sources of financial news and analysis.


The cacophony of "noise" that distracts investors and threatens to veer them off course has been acknowledged for some time--a by-product of the information age and digital era in which we now live.

This recently became even more problematic, when paired with another by-product of the modern era: social media. After the US election, Facebook faced-up to widespread criticism that it had failed to adequately filter out fake news, particularly from pro-Trump contributors, which may have ultimately affected the outcome.

In mid-November, Facebook CEO Mark Zuckerberg issued a statement indicating it would take a greater role in fact-checking some of the material published as news on its website, albeit with caveats.

"I am confident we can find ways for our community to tell us what content is most meaningful, but I believe we must be extremely cautious about becoming arbiters of truth ourselves," Zuckerberg said.

Fellow social media icons Twitter and Alphabet (Google) have also announced plans to tweak their coding to help filter out fake stories.

Applied to the financial services landscape, the issue takes on an entirely different complexion, for example, in the potential for fake news to spur mass stock sell-offs or to artificially inflate a company's value ahead of an IPO or acquisition.

View from the regulator

Australia's financial services regulator, the Australian Securities and Investments Commission (ASIC) has also taken note. In early December, ASIC announced it is working on a machine learning process that will be applied to Australian Securities Exchange (ASX) market announcements.

This would enable an algorithmic process to quickly detect and recognise the presence or mention of entities of interest within unstructured text announcements. These entities of interest might be an organisation, person, transaction or any other type/group of pre-trained 'entities' that might warrant further scrutiny.

This can then be analysed alongside real-time trading activity to identify possible cases of market manipulation or other forms of market misconduct.

The same technology could also potentially be developed further to detect relationships between entities--either individuals or companies--and could also track trends in investor sentiment or other variables by analysing textual content available online.

While in its infancy, this technology could later expand into the creation of real-time or historical benchmarks, providing for more detailed tracking of financial news.

Listed companies have long suffered under the scourge of fake news, well before the advent of social media channels. Prominent examples include IT company Lucent, cosmetics manufacturer Avon Products, and insurer Tower Group International.

Twitter also saw a spike in its share price last year, after a hoax article purporting to be from Bloomberg News spoke of a fake US$31 billion takeover offer.

Of course, long-term investors with a properly calibrated strategic approach should not be overly affected by such noise. Morningstar has always focused on the big picture, and ignored speculation and knee-jerk reactions.

The recent fair value estimate (FVE) re-rating of supermarket majors Woolworths and Wesfarmers is a prime example. Only after a months-long period of deliberation and analysis was the FVE reduced.

"At Morningstar, we generally take a very long-term view on our markets and on our views of the market and where it's trending," says equity analyst Johannes Faul.

"And in doing so, the near-term margins we already had lowered for both Wesfarmers and Woolworths; however, it's the long-term outlook really that we've changed, amended and that has had that significant impact on our valuations."

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Glenn Freeman is Morningstar's senior editor.

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