False stories published online have caused headaches for investors. But the fightback against fake news has begun, writes Jason Bohnet at Aviva Investors.
Aliens invaded America on October 30 1938. Radio announcers described the progress of Martian war machines. Giant robots stalked the streets, firing heat-rays.
Orson Welles’ radio dramatisation of The War of the Worlds was so realistic it was famously mistaken for a genuine news broadcast.
Although stories of a mass panic were exaggerated, many people were frightened. One listener attempted to sue the Columbia Broadcasting System radio network for $500,000. He cited nervous shock brought on by fears of an alien attack. Another claimed for the cost of a train ticket bought to escape the Martian invasion.
The War of the Worlds served as an early warning of the chaos ‘fake news’ can cause. Welles’ intentions were to entertain, but today’s fakers have more nefarious ends. And the financial consequences can be more expensive than the cost of a train ticket.
The lines between genuine news and opinion are becoming blurred. This hurts the reputation of technology firms and erodes trust in reliable media sources.
Social media and markets
There are several reasons why fake news has become a hot-button issue in recent years. The most obvious is the advent of smartphones and social media.
The rise of social media means false stories can now reach millions of people before they are debunked. ‘Bots’ flood Twitter and Facebook users with information. This can influence the way they think and behave. Fake stories have also begun to impact financial markets.
Take the ‘hack crash’ of April 23 2013. Gaining access to the Twitter account of the Associated Press, hackers posted a tweet suggesting then-US president Barack Obama had been injured in a bomb attack on the White House. The story was quickly discredited, but not before the S&P 500 had fallen sharply. This temporarily wiped $136.5 billion off the value of the index.1
A few months earlier, Bloomberg had put Twitter on its software platform and the fake tweet appeared on its terminals. The AP hack is also thought to have triggered trading algorithms that scrape text from websites. US equities quickly recovered after the tweet was deleted. But the incident raised questions over the potential of social media to stoke market volatility.
The vast majority of the financial world uses Bloomberg as its trading backbone and research platform, so tweets that appear on Bloomberg terminals can have a big influence on markets.
The idea that made-up stories might influence financial markets isn’t new. In the early days of global trade, London-based investors found out how shipping companies were faring by sending scouts to the Cornish coast to catch an early sight of their vessels’ cargo. Some of these investors realised they could make more money by inventing reports that inflated the value of their holdings.
Social media has brought more sophisticated versions of this method. A recent academic study found messages posted by Twitter bots increased volatility and influenced pricing among FTSE 100 companies. This pointed to efforts to manipulate the market.
The effects of this activity are, for the most part, limited to intraday trading. But it could threaten market stability if it becomes more common.
Most cases of online market manipulation are discovered quickly. Take French construction company Vinci. Its share price dropped by 19 per cent on November 22 2016, after a fake press release that alleged accounting irregularities appeared online.
Other examples of fake news have longer-lasting effects. The SEC revealed last year that it took enforcement actions against 27 individuals and companies because of stock promotion schemes. In each case, investors were misled into thinking they were reading independent analysis on websites. In fact, companies were secretly paying writers to promote their services.2
A study from experts at the Yale School of Management following found deceptive ‘paid-for’ articles boosted share prices of smaller firms by an average of seven per cent over a period of months. Individual investors were likely to be more adversely affected than asset managers. The study found fake news may even cause individuals to lose trust in real financial analysis.3
The future of fake news
The problem of fake news may get worse before it gets better. Telling truth from falsehood is likely to become even more difficult in an era of AI and machine learning. Adobe has revealed a piece of audio software that lets users make up new sentences by feeding in audio clips of a person’s voice.
Researchers at the University of Washington went a step further in 2017. They created an AI-driven programme that can tweak images and audio to create fakes. One example was a video in which President Obama delivers an invented speech.4
There are ways for experts to debunk these inventions by looking at the digital code. But such methods take time. A fake video of a politician or corporate leader could go viral in minutes.
Big technology companies are keenly aware of the reputational risk – and the threat of heavy regulation – they face due to fake news.
In the US, Internet companies are not currently held legally responsible for content posted on their platforms. Under Section 230 of the Communications Decency Act of 1996, they are treated as intermediaries rather than publishers.
These laws were designed in the early days of the Internet to shield small start-up companies from expensive legal costs. Many people now think they are outdated.
In response to growing scrutiny from politicians and even their own users, the operators of social media platforms and search engines are trying to get rid of fake news.
Facebook and Google have moved to oust known fake news sites from their advertising networks. They have also made a series of ‘acqui-hires’ of start-ups developing software to root out fakes as well as hiring new moderating teams to police their platforms.
In the short term, such investments could eat into big tech firms’ profit margins, says Bohnet. Tens of thousands of extra content moderators do not come cheap.
Fighting fake news
Aware of the damage fake news can cause to their brands, various companies are taking their own steps to defend themselves from false stories.
Bohnet believes there may be the odd ‘unicorn’ success among these young firms. But larger companies with established AI teams will have a head-start when it comes to creating programmes that can identify false stories.
This means that while fake news is currently causing problems for the big tech companies, their AI nous could provide them with solutions and opportunities over the longer term.
Some tech firms are already creating anti-fake news products as a sideline. One example is cybersecurity specialist Cisco. Its unit Talos is developing technology that can detect the ‘stance’ of a news article. This could help identify subtle attempts to persuade readers with false information.
F for fake
As technology becomes more sophisticated, it is likely to involve a more insidious erosion of facts, rather than grand deceptions in the style of War of the Worlds. Later in his career, Orson Welles made a film called F for Fake, a “documentary” about art forgers that leads viewers to question the narrator’s reliability. Like that movie, fake news will continue to blur the lines between truth and illusion. Investors will need to be vigilant to avoid the pitfalls.
2‘SEC: Payments for Bullish Articles on Stocks Must Be Disclosed to Investors,’ SEC press release, April 2017
3 ‘Does fake news sway financial markets?,’ Yale Insights, June 2018
4‘Fake Obama created using AI tool to make phoney speeches,’ BBC News, July 2017
Jason Bohnet, CFA
Senior Research Analyst – TMT Sector Lead
Jason is responsible for covering the technology and media sectors of the global equity markets.
Prior to joining Aviva Investors in 2016, Jason was a senior research analyst at USAA Asset Management. Jason also worked as a Financial Analyst for the USAA Federal Savings Bank, where he helped with Asset Liability Management (ALM), Interest-Rate Risk (IRR), and MBS Investments.
Jason holds a Bachelor of Science degree in Business Administration from Texas A&M University (College Station) and completed his MBA at the University of Texas at San Antonio. He is also a CFA® charterholder and a member of the CFA Society of Chicago.
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