Cooking Up a Storm28. January 2013 by Joachim Goldberg
There was outcry last week when the German DAX index slumped 100 points in just a few minutes. It subsequently recovered, but not before complaints were made about market manipulation and ‘fat fingers’. An explanation was easy to find on Twitter: apparently, there had been a rumour about the supposed resignation of Bundesbank chief, Jens Weidmann, which was swiftly denied by the German central bank. It even seemed as if Twitter was precisely the means by which the rumour had spread – a financial news agency with 10,000 followers. It was suggested the rumour had been deliberately started in order to provoke mini-panic in the markets, hence the investigation by BaFin, the German market regulator.
Market manipulation, via the deliberate spreading of false news reports in order to profit from the subsequent market reaction, is a questionable business, and one that justifies the attention of stock market regulators. However, rumours are as old as the markets themselves. In pre-Twitter times traders would use the telephone, voice brokers or telexes to get their message across. It also took longer for the rumours to be denied because the news media was not as speedy as they are today. However, one thing is unchanged: rumours (as with other kinds of information) only find an ear when they are welcome. Herein lie the risks for the one who starts the rumour: unless the right rumour comes at the right time, it will not have the desired effect. On another day, for instance, the news of a Weidmann resignation might not have produced knee-jerk DAX selling at all. Perhaps, it would have had the inverse effect, presumably with the explanation that the last naysayer on the ECB’s Governing Council had finally thrown in the towel and the Bank could now pursue a more aggressive monetary policy. Perhaps nobody would have believed the rumour at all. After all, Weidmann became president of the Bundesbank precisely because his predecessor had quit in protest; he wouldn’t have been nominated if his intention was to do the same.
I also find interesting that people get upset by rumours only when they cause stock prices to fall. Had the DAX shot two percent higher on the back of an unconfirmed news report, would there still have been complaints? The only ones who would have suffered in this case are speculative short-sellers and they deserve no better, goes the popular refrain. However all investors who had missed their chance to buy at the previously prevailing prices would also have incurred opportunity costs. These are the kind of losses that nobody sees though.
So although there is an official desire to limit rumour-mongering, it is a futile one. Even if the guilty parties can be identified, the punishment is unlikely to be dissuasive. This is because investors and traders always operate on the basis of unconfirmed stories. They are called expectations, hopes and sometimes even dreams, but rarely naked facts.