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Markets and Mistrust


Introduction

From the era of barter transactions where transactions could only take place due to double coincidence of wants to the modern era where millions of funds are moved in seconds in the form of bitcoins, markets have evolved as an efficient way to organize economic activity. As the size of a market increases, so do the risks concomitant to it. Some risks can be anticipated in advance owing to the prudence of the investor but some happen overnight leaving no possible way to assess them in advance or even regulate them, which makes one truly wonder: ‘Is investing in the market really a gamble that it is perceived to be?’

The following are the major categories of rising market anomalies where sentiments defy fundamental reasoning-

Tweets

Tweets by HNIs (High Net Worth Individuals), actors, influencers, businessmen, political leaders etc can have a prodigious impact on the share prices of a company and can even have inter-industry repercussions at large. The tables could turn overnight or even in a fraction of a second, highlighting the futility of the myriad of fundamental, technical and market analyses conducted by investors. Such tweets in themselves are not subject to regulation because the concerned person is just presenting his views on a particular topic, which by the letter and spirit of the law is permitted.

A tweet by Elon Musk stating “Dogecoin is people’s crypto”,flew in the face of all market behaviour, surging its price by 50% in a single day!

Similarly, when Musk just tweeted the word “Gamestonk!!”, along with a link to ‘WallStreetBets’, a stock trading discussion group on Reddit, it sent intraday traders on a frenzy and the Gamestop stock price rose from $147.98 to $347 in the nick of time!

Fake News

False or misleading information is a form of disinformation engineered to mislead consumers of information, the ramifications of which are further exacerbated by the attention they receive. It directly leads to a large-scale buyout or sellout, contrary to all rational market indicators. False content imposes private and public costs by making it arduous for consumers to infer the truth, reduce positive social externalities from shared-information platforms, increase scepticism and distrust of legitimate news, and potentially cause resource misallocation.

In 2013, $130 billion in stock value was wiped out in a matter of minutes when Associated Press tweeted about an explosion that injured Barack Obama. This later turned out to be a hoax as Associated Press claimed that its Twitter account had been hacked!

There is no mechanism with which the tech giants across the world can separate good news from the fake ones and hence identifying fake news in itself is a humongous challenge to deal with, let alone the problem of suppressing it.

Misinterpreted information

Information when misinterpreted brings chaos. Such information abides by the letter but not the spirit of the law. Such information changes market outcomes by bringing about a change in the way investors perceive things. Critically analysing from a regulatory point of view, there is no room for any investigation or charge against the source of misinterpretation (although, it may be intentional to some extent) and the outcome it generates.

To give an example, when Elon Musk tweeted “Use signal”, he meant Signal, the encrypted messaging service app, but instead shares of Signal Advance witnessed an increase of 6350% over three trading sessions, which in fact is a private limited company headquartered in Rosharon, Texas that trades under the ticker SIGL on over-the-counter markets and has no ties with the messaging app or the South African billionaire himself.

Emotionally surcharged investors

It is a popular belief that emotions play a pivotal role in determining the tide of the market. Comments which support or condemn or are presumed to support or condemn religious, cultural and societal norms have massive consequences, the reverberations of which are widely felt in the World Markets. This generally includes a negative impact on a company’s stock because of the aggressive reaction from a particular class or section of society. Numerous examples can be quoted from history as evidence to prove this fact. When the CEO of Snapchat said, “Snapchat is not for poor countries like India” – its stock cascaded around the world, followed by negative reviews and massive uninstallment of the app from phones in India, which was pretty much the largest user base for Snapchat.

Tanishq, as part of its campaign to launch its new jewellery collection ‘Ekatvam’, advertised an inter-faith marriage showing how a mother-in-law respected her daughter-in-law’s faith, which drew criticism from a nocuous section of the society that threatened violence against the brand, forcing Tanishq to withdraw its advertisement. A huge controversy took place among the masses, creating a buzz around Tanishq, ultimately benefiting its parent company, Titan, as it saw its stock price surge to new heights.

Eminent personalities, whose one tweet has the power to shoot up or plump down the stocks of any particular company, have a moral and ethical obligation to behave in a more responsible manner. A fair share of thought must be given by them to any particular topic before posting their opinions on any form of social media. If such eminent persons post apt messages at the apt time, it can save dying indigenous industries of a particular nation or even prevent the loss of market share to foreign brands, chalking out the way for developed economies around the world, and paving way towards globalisation.

Extent of control of regulatory bodies

Regulatory bodies are formed around the world to regulate markets and their activity. Different types of markets are regulated by different types of regulators. Their primary activities revolve around repairing the cracks in the system exposed by the global financial crisis, ensuring the implementation of regulations in a methodical manner and assessing evolving markets and their risks, thereby taking steps to neutralize them before they disrupt the global markets. The following are the various techniques that can be employed in order to control the repercussions of volatile markets to some extent, if not fully.

Self-regulation

Some industries might be subject to self-regulation. Industry members may collectively establish a code of conduct, which all the members of the industry must be expected to follow and stringent actions can be taken against those who violate it. Industries may also incorporate a licensing system whereby the members are given a license on their agreement to industry norms and practices and the same can be withdrawn subject to their behaviour.

In 2002, major supermarkets in the UK established a voluntary code of conduct following the criticism by the Competition Commission in 2000.

Price Capping

Regulators can set price controls or cap the minimum and maximum prices if they are convinced that a particular company’s stock is unfairly soaring sky high or plumping to the ground. This way regulators can ensure that the respective company isn’t making windfall gains or preparing to wound up its affairs. Regulators may impose a price cap for a particular company or for all the companies in an industry, permanently or for a time frame, and may even remove price caps if they believe that competition in the market has increased sufficiently, as in the case of Ofcomwho removed BT‘s price cap in 2006.

Windfall taxes

Regulators could impose taxes on windfall gains, thus, limiting the profit maximising capacity arising out of brand monopoly or natural monopoly. This tax would drive the firm to go for further investment in its own project, ensuring market and consumer welfare.

Unbundling

Unbundling is one of the significant strategies of the regulators, whereby they open up the market to potential rivals, thereby forcing the price-maker firms to become price-takers, so that mutual decisions can be taken benefitting the industry as a whole. This strategy is brought into effect by stripping down barriers to entry in a market. This is a common practice in the communication industry where incumbents may have significant market power over the use of the network they own.


Limiting integration

Regulators may prohibit further mergers and acquisitions (M&A) in particular industries to stop the level of concentration in the industry from increasing thereby preventing clustering of market power in a few hands.

Re-nationalisation

Transferring of private ownership to public ownership is referred to as renationalisation. Regulators may force some private companies to sell their majority stake to the government if it is convinced that such sale is in the interest of the public, thereby changing the company’s objective from profit maximisation to sales maximisation or market share maximisation.

Conclusion


Markets are always accompanied by risks, some of which can be anticipated owing to the prudence of the investors while some cannot. Some amount of risk is still unavoidable on the part of investors when they invest in the market (as the future is anything but certain) and the degree of risk rises with the investor’s drive for profit and frequency of trade. But when one witnesses an overnight rise and fall in the market because of a tweet, fake news or misinterpretation, one cannot help but wonder, ‘Did personalities like Warren Buffet and Ray Dalio, step into their billionaire shoes because of their deep knowledge of the markets and their frameworks or just sheer luck?


By Ankur Tulsyan

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