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Social Media and Financial Markets

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By Pallavi Kolhapure – Shah, Co Founder, Prose Integrated

Social media is a forum for people to form groups, express opinions, share feelings and discuss on any topic on an electronic or digital platform. These platforms keep changing from the erstwhile BBM to WhatsApp, Facebook, Twitter, Moneycontrol Chat rooms or a more detailed format called Blogs. The explosion of smart phones and data speeds have resulted in an explosion on social media impacting on the way people think and communicate.

While research has demonstrated that likes, shares and re-tweets influence not just our opinion, in daily life, but also majorly impact our buying behavior for consumer goods, fashion brands and durable. The natural question that arises at this point is on the power of social media influencing financial markets.

While Bloomberg and Reuter’s terminal have been the source of breaking news for decades, the masses in Indian financial markets have graduated from the sharing of breaking news via voice, SMS or email. Twitter, Facebook, Message boards and WhatsApp groups are the new meeting place. Today, almost all the leading financial analysts, economists, policy makers, government authorities widely express their opinions and thoughts through their Twitter handle, Facebook posts and Blogs. And the number of followers at times is as high as a news channel – making more people listening to them than ever. There are over 2.25 million messages exchanged on the topic of a single stock on Moneycontrol Messageboard alone!

The community of online Indian stock market followers ends up discussing everything from their concerns, giving predictions and voicing their opinions ahead of any development. This at times does indirectly influence the way investors decide their course of action. Brexit was the most searched globally and on home ground #Rexit (Exit of Raghuram Rajan) impacted many decisions. The financial markets showed caution and investors changed their positions.

A recent paper co-authored by Professor of Finance at the University of Liverpool Costas Milas showed that during the recent Eurozone crisis, social-media discussion and Google searches related to “Grexit” affected the spread in borrowing costs between Germany and peripheral Eurozone countries Greece, Ireland, Italy, Portugal and Spain. This was over and above the effects of the latest economic data.

While the announcement of RBI Governor Raghuram Rajan isn’t continuing the second term as Governor did send shock waves, with institutions and policy makers wondering the impact, speculation of Rupee losing its strength was widely discussed. The hashtag #Rexit trended for a good time and almost everyone was either talking or wondering about the impact of Governor’s exit on the markets.

The impact of # and @ can be gauged by a fake tweet on April 23 2013 from a hacked Associated Press account that reported explosions in the White House injuring Barack Obama. This single tweet wiped more than $130bn off the value of the S&P 500.

Regulators too have noted the impact and misuse of social media. An article earlier this year stated that Indian financial market regulator SEBI cited ‘mutual friends on Facebook’ as insider trading evidence. Yet another instance, which made headlines globally, was that of Scottish financial trader James Alan Craig. He has been charged in the US for allegedly using Twitter to manipulate share prices. According to the US Department of Justice, the 62 year old Craig caused shareholders to lose more than $1.6m (£1.1m) after allegedly spreading “fraudulent” information about companies on the social network. According to media reports, the US Department of Justice has charged him with securities fraud, while the Securities and Exchange Commission has filed a separate complaint charging him with the same offence.

So it is high time Indian market regulator step in before investors are taken for a ride by some fraudulent miscreants. Investors should also dutifully keep a tab on #BREAKING, #NIFTY and #SENSEX as they may be the next big breaking news on twitter and similarly at any other media platform.

 

About the author: IE&M Team

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