News breaks on Twitter.
So do rumors, hoaxes, and outright frauds aimed at manipulating stock prices.
For companies that mine the internet and social media for information hedge-funds can trade on, quickly spotting an online spoof is critical.
It's not just about keeping someone from making a bad trade.
Funds that identify a pump-and-dump scam can profit by selling a stock before the inevitable drop in its price.
When someone created a fake Bloomberg News story that Twitter itself was fielding takeover bids, analytics firm Contix immediately spotted a few clues that it was a hoax.
For starters, the scoop wasn't being tweeted by Bloomberg's own social media accounts, the firm's founder Ryan Bailey told Business Insider.
The story also wasn't on a Bloomberg.com web address, and Contix was able to determine the website it was on had been created just days before. The hoax led to a gain of as much as 7% in Twitter's shares.
The frauds aren't always that elaborate. In some cases they're just an extension of an age-old practice of posting pump-and-dump rumors on internet chat rooms. Social media, though, offers fraudsters a way to blast rumors "to large numbers of people with minimum effort and at a relatively low cost,” the Securities and Exchange Commission warned last year.
“It’s a natural evolution to go from chat rooms to social media like Twitter,” said Greg Morvillo, a white-collar criminal defense attorney. The SEC declined to comment for this story, and Twitter didn't return calls for comment.
Contix deals with those by red-flagging Twitter handles that regularly disseminate bad information, Bailey said.
Pulling accurate signals out of social media is no easy task, but analytics firms have identified patterns that follow credible news breaks so they can also tell when to be wary of something.
"We look at chatter volume, sentiment volume, but we also look at velocity," said James Ross, co-founder of HedgeChatter, another analytics system for social media posts. "In other words, how fast these messages pop up."
Another strategy, currently not in use by HedgeChatter, would be to compare stories to newsroom style-books, Ross said. Fake stories and press releases are typically riddled with errors and inconsistencies, and it's unlikely hoaxers will take the time to replicate the Associated Press' writing style.
Still, there's some things that even the most sophisticated analytics systems will have a hard time catching.
In 2013 the Associated Press’ Twitter handle was hacked and falsely reported an explosion at the White House, causing wild stock market movements.
The Syrian Electronic Army claimed responsibility for the hack. An AP representative said the organization hasn’t heard of any arrests in connection with the case.
One way to instantly spot a fraud like that might be to find real-time data from other sources – like photos being uploaded at the very same moment – that contradicts the report. That could prove to be a challenge.
“You’d have to be very sophisticated to do that,” Ross said.
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