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.

Wednesday, April 24, 2013

Labor doesn't understand us, business leaders lament. Company directors say relationship is at new low.

By Business editor Peter Ryan

The Government's already strained relationship with the business community has hit a new low according to a survey of company directors.

The Australian Institute of Company Directors polled more than 500 business leaders and only 8 per cent said they thought the Federal Government understood business.

The Institute's "Director Sentiment Index" points to the mining tax, the carbon tax and the National Broadband Network as examples where companies say poor process and a lack of consultation damaged the business relationship.

"In the old days perhaps - and this might be looking through rose coloured glasses - but we used to have say a green paper which said, 'here's an issue which needs to be discussed and thought about', and then you'd go to a white paper and you'd say well look, 'here's some options how you can deal with this issue', and then you'd go to legislation and then you'd have in-detail legislation and discussions about that, and you end up with a pretty good result," said the Institute's chief executive John Colvin.

"I guess the concern of the directors is that that type of good process hasn't been applied to so many issues - including legislation coming unannounced - without proper analysis of whether this is good legislation, whether it's good regulation, and then surprises."

Mr Colvin says the survey outcome reflects the business reaction Labor Government since it came to power in 2007.

"The figures speak for themselves, 80 per cent of the directors think that our Government doesn't understand business," he said.

"I think that it's really the cumulative effect of the way in which directors and business have been treated over, you know, the long period of time.

The Opposition comes out better in the survey, but still only half of those surveyed believe the Coalition has a good understanding of business needs.

John Colvin says that should send a message to both major parties to consult more widely with business before announcing policies.

"It's a warning that business and the director communities can't be taken for granted, can't have laws just changed willy-nilly, can't have sectional interests running policy, and must have really good processes and really good policy discussions before moving in big directions. It's that synergy which is so critical," he concluded.

Wall Street dives on false tweet about White House explosions; shows markets vulnerability to social media

By Business editor Peter Ryan

Markets live and die on rumours - as the interchangeable saying goes "buy on the rumour, sell on the fact".

But what happened on Wall Street around three hours before the close of trade (3.08am Sydney time) shows how sensitive markets are to rumours that now abound on social media outlets such as Twitter.

A report on a Twitter account managed by The Associated Press wire service said there had been explosions at the White House and that President Obama had been injured.

Investors, clearly sensitive after last week's bombings in Boston, appear to have sold on an unverified report from a reputable source that terrorism had struck again.

The brief panic from the report - immediately denied by the AP - erased around US$130 billion from the Standard & Poor's 500 Index. Market movers like Apple, Exxon-Mobil and Microsoft were caught up in the selling.

However, Wall Street's broad market indicator quickly recovered to end the day more than one percent higher.

Speculation is focusing on computerised trading as a key cause, where "stop loss" orders can be triggered when a certain price threshold is hit.

However, in the world of expanding social media, there are concerns that algorithmic trading programs can be programmed to read news headlines and tweets where key words can spark alerts.

So it's possible that an algorithm - rather than a human - may be responsible for this morning's selloff when the fake AP tweet was retweeted around the world.

The snowball effect - where unverified reports and rumours are often aired without normal checks and balances - shows the world's exposure to social media.

Today's brief plunge is a reminder of the "flash crash" in May 2010 where rolling stop loss orders - rather than a fat-fingered human trader - saw the Dow plunge 1,000 points in a few minutes.

The brave new world of social media will have many investors yearning for the days when human emotion - rather than computers - made decisions that can change lives and manage minds.