Thursday, April 25, 2013

Tweet revenge: ASIC warns on social media risks; calls for old fashioned commonsense and due diligence

By Business editor Peter Ryan

As US authorities investigate the source of a fake Twitter message that sparked a share slip on Wall Street, the Australian market regulator is warning that social media cannot be trusted.

The chairman of the Australian Securities and Investments Commission, Greg Medcraft, is in New York for conference, and says yesterday's brief but sharp dip on Wall Street due to a fake news tweet  this week's brief, sharp dip on Wall Street due to a fake news tweet should be a wake up call to investors everywhere.

He says, while social media is here to stay, independent verification of alerts that go viral is more critical than ever.

Listen to my interview with ASIC chairman Greg Medcraft.

"New media, particularly Twitter, is not necessarily the source of truth," he cautioned.

"The other thing its highlighted is good old common sense and scepticism that basically you've got to do your due diligence."

Reports from the US have suggested that some of the market response to the fake tweet was generated by automated trading algorithms that monitor Twitter and other social media sources and trade based on that information.

Greg Medcraft says automated trading is the "new normal", including in Australia.

However, he warned that algorithms that scan news headlines and social media for key words need to have better filters to ensure that humans - and not emotionless machines - decide when to buy or sell.

"I think what is important is to make sure that if your algos [algorithms] have that type of element built into them that you're constantly reviewing it to make sure that doesn't come out with a potentially adverse outcome," he said.

"But also, that you've got the overall protection, which we've now required, that you do have a filter that allows for the algo to not operate where there perhaps is an extreme price movement that might be occurring for an unexplained reason."

In an Australian context, Mr Medcraft says the false takeover bid for David Jones provides a good example of why traders need a high level of scepticism when confronted with unverified breaking news or rumours.

"You really do need to focus on the accuracy of information being provided to the market and you need to think about what action you take in relation to perhaps where the market is trading on misinformed information," he said.

Mr Medcraft says companies also have a role to play by asking for a suspension of trade in their stock when they believe trading is being driven by misinformation.

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