Social media vs. news media
How investors get their news has changed dramatically over the last decade. Traditionally, news media from the FT and the Wall Street Journal to the financial TV channels broke the news about companies and the economy to a broader audience. As social media platforms became more popular, the media buzz was mirrored in the social media platforms. However, with newsroom funding declining and social media platforms growing, more and more journalists are taking their cues on what to report from Twitter and Facebook. In other words, social media increasingly drives news media. The chart below shows the result of an investigation into buzz about financial markets. The blue line shows the size of the influence social media has on news media, while the red line shows the influence news media has on social media. The shift in leadership could not have been more pronounced.
Drivers of media buzz
Source: Gan et al. (2020). Note: Blue line shows the size of the influence of social media on news media, the red line the reverse.
But has any investor worried about the impact this leadership by social media has on market integrity? Social media is much almost unregulated, and it is easy to spread rumours and fake news on it. If the audience of a Twitter or Facebook account is large enough, this fake news can spread like wildfire and lead to significant swings in share prices.
In the past, a market manipulator had to pick up the phone, call a journalist and start a conversation with the famous line: “What is it I hear about company A needing fresh capital?” The journalist had then to be gullible enough to spread the rumour. But usually, journalists would wise up to such efforts and become a valuable filter to fake news and rumours.
As the example of fake news in the political corners of Twitter and Facebook shows, there is no need for a journalist anymore. Instead, fake news can spread to a large number of gullible readers, and even if the news is debunked, the sources of fake news hardly ever lose influence.
I wouldn’t be surprised if the next wave of market manipulation scandals will not originate based on insider trading or the like, but on price manipulation using fake news on social media.