While the digital age has democratized access to information, it also puts disseminators of false information on a level playing field with formal purveyors of news and data.
And now that we’re in the era of high-frequency trading, that means short sellers, activists, errant trades and even just pranksters have the ability to cause short-term damage to a stock whose fundamentals are otherwise sound.
The 2010 Flash Crash is the most famous example of the sort of havoc that can unfold from an errant trade. A trader at a large mutual fund company mistakenly entered an order selling a sizable position in E-Mini S&P 500 futures contracts.
Though the sale occurred in the futures market, the fact that the contract is a derivative of the S&P meant that many high-frequency trading programs treated this move as having implications for the broad equity market. Within minutes, the programs initiated a wave of selling that accelerated until the Dow Jones Industrial Average was at one point down almost 1,000 points that day.
Thankfully, the market quickly recovered, and the New York Stock Exchange (NYSE) instituted “circuit breakers,” that curb trading in a security that rapidly swings by a certain percentage threshold over a very short period. As high-frequency trading spread to other equity markets around the world, many foreign exchanges have since followed the NYSE’s lead.
Nevertheless, on Jan. 7, shares of Australian coal miner Whitehaven Coal Ltd (ASX: WHC, OTC: WHITF) quickly fell from AUD3.52 to AUD3.21 following the issuance of a press release that stated a key $1.2 billion loan had been cancelled for ethical reasons.
However, the press release, which appeared to be published on Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF) letterhead, turned out to be a hoax perpetrated by a young anti-coal activist named Jonathan Moylan. The press release asserted that financing for Whitehaven’s Maules Creek Project had been cancelled largely because the open-cut coal mine could cause “significant dislocation of farmers, unacceptable damage to the environment, or social conflict.”
Compounding the confusion was the fact that the contact info listed on the press release was for Moylan himself. For a time that day, the activist took phone calls from the media regarding the press release and answered their questions as if he was actually a member of ANZ’s media relations department.
Interestingly, Moylan pulled off this stunt while camping out in front of the Maules Creek Project as a form of protest. Regulators have since gone to the site and confiscated Moylan’s laptop and mobile phone, and he could ultimately face a steep fine as well as prison time, though he has yet to be charged with anything. Both Whitehaven and ANZ are also exploring their legal options. Indeed, it’s likely that Moylan could be made an example as a deterrent to such hoaxes in the future.
After all, this latest prank marks the third time in less than a year that a stock on the ASX has been the victim of a hoax. In July, retailer David Jones Ltd (ASX: DJS, ADR: DJNSY) was caught up in rumors that a mysterious private equity firm had made an AUD1.65 billion offer for the firm. And in October, bogus emails suggested the CEO of mining services company MacMahon Holdings Ltd (ASX: MAH, OTC: MCHFF) was considering a takeover bid from a Chinese firm that would have been a substantial premium to the share price.
While the Australian Securities Exchange (ASX) does have a rule that cancels pending trades when stock prices swing by 10 percent over a very brief period, Whitehaven’s management team was able to convince the ASX to halt trading once shares had dropped 8.8 percent. Whitehaven’s stock ended the day at AUD3.50, thus recovering nearly all of its loss following the fake press release.
That underscores the fact that it’s important for investors take a long-term perspective toward their holdings. While exchanges and regulators will likely always be one step behind thwarting all such hoaxes, investors can shield their portfolios from potential damage by avoiding placing stop losses on existing positions and simply monitoring them instead.And if investors place ultra-stingy buy limits on a “good ‘til cancelled” basis, they could conceivably turn such events to their advantage by picking up shares on the cheap before trading is halted.