New Market Manipulation

Steven is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

We Have a Problem

Gordon Gekko would be proud. Apparently all it takes to manipulate the stock market now is 140 characters. On 1/29/13, a Twitter account posing as the Twitter account of a market commentary site reported that, "Audience noise suppression company being investigated by DOJ on rumored fraud charges Full report to follow later". The Twitter account with eight followers was a blatant fraud. Audience (NASDAQ: ADNC) is not under investigation. To the contrary, Audience blew away earnings by $0.04 when it released earnings on January 31 and guided upwards for 2013. Algorithms which trade on news, however, could care less about that. As the algorithms took over, the trading volume in the price spiked to and the stock price declined 23% on the fake news.

(click to enlarge)

<img src="" />

This is not an isolated incident. Sarepta Theraputics (NASDAQ: SRPT) had the same type of incident happen the following day. An imposter of a research firm posted on Twitter, "$SRPT FDA steps in as its 48 weeks results on Eteplirsen results are tainted and have been doctored they believe Trial papers seized by FDA." Accordingly, the price spiked down on massive volume. Sarepta's management came out against this false accusation in a statement which directly addresses the rumor in the false Twitter account. In addition, the rumor is as false as can be. There is much anticipation of this drug and this could be a potential gamechanger for this firm as it nears market introduction.

(click to enlarge)

<img src="" />

While these are not incidents of algorithmic trading having errors, this is an example of how easy it is to manipulate the market now. Leaking false information is nothing new, and there are rules in place to discourage traders from tactics such as "pump and dump." However, this makes manipulation easier than ever. The aggressive programming in these algorithms has those "boxes" shooting first and asking questions later and as a result the market is suffering. What is now apparent is how easy it is to trick these algorithms and we can all expect to see more of this.

Long Term Implications

This is a potential long term problem unless the Securities and Exchange Commission [SEC] steps in immediately. What is apparent from the issues of fraud as well as the issues of glitches such as the Knight Capital error is that there is an uncontrolled risk in the market. Megacaps like Apple, the IBEX 35, and even exchanges themselves such as BATS are not immune. This is where there are major long term concerns for the markets. If long terms investors can't invest in the most liquid blue-chip stocks without fear of an errant algorithm wiping out the stock, why would they put their money there? The more that stories like this occur, the more it makes the case against trading stocks especially for the retail investor who cannot easily maneuver in and out of positions. The SEC needs to step in. The SEC has acknowledged that something needs to be done but it doesn't seem to know what to do. The SEC does not seem to understand the algorithmic trading but that should not be the issue. The SEC could step in and pass rules to impose steep fines for these errant trades. Instead, however the SEC continues to sit and let these trades ruin the market and push the investor further away.

The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join usand write your own! Business relationship disclosure:

This article is written by Joseph Morrison. He does not own shares in any of the stocks mentioned in this article. Business relationship disclosure: The article has been written by Wall Street Trading, a group of junior market analysts. Wall Street Trading is not receiving compensation for it (other than from Motley Fool). Wall Street Trading has no business relationship with any company whose stock is mentioned in this article.

blog comments powered by Disqus