New images of smoke billowing from the Pentagon, reportedly from an explosion, sent the stock market into a panic this past week.
And for good reason. The infamous September 11, 2001 attacks on the World Trade Center and the Pentagon resulted in the horrific loss of life and property. They also significantly damaged the American economy, tanking the stock market by as much as $1.4 trillion. Years of gains were wiped out in an instant.
Thankfully, no people or property were hurt this week. The new, fiery images of the Pentagon were not real; they were merely artificial intelligence-created deep fakes seemingly designed to manipulate the markets.
A fake Twitter account called “Bloomberg Feed” sent out a tweet claiming, “Large Explosion near The Pentagon Complex in Washington, DC – Initial Report.” An India-based Twitter account then aired “Live & Breaking” news of the Pentagon explosion. They invited Professor Madhav Nalapat, a “strategic expert” on the show to discuss the explosion. Russia-based Russia Today, with its 3 million followers, then reported on the AI-generated blast as if it were real. The S&P 500 dropped by .26% but recovered when Arlington, Virginia fire and EMS publicly stated no explosion occurred near the Pentagon.
Whether this episode was an attack on our economy, a sophisticated attempt by short sellers to quickly profit from the disruption in the market, or just a prank remains to be seen. However, in any case, it should serve as a critical warning for investors and stock traders who traditionally react with eagerness whenever explosive news hits the wires.
The speed at which information travels in the digital age means that false reports can spread rapidly, causing panic while influencing market movements. Investors must verify the authenticity of news before making any hasty trading decisions. This is especially true given how often bad actors weaponize misinformation for self-serving purposes.
Short selling is a common investment strategy where traders borrow shares of stock from a broker and sell them in the hopes that the stock's price will decline. If the price drops, the trader can buy back the shares at a lower price and return them to the broker, making a profit on the difference. While short selling is a legitimate and widely practiced strategy, it is also often exploited for malicious purposes.
Many investment firms specialize exclusively in shorting companies. These companies often issue damning reports that make allegations about the governance of the entities they are shorting. Sometimes the information they provide is accurate; other times, they exaggerate and even fabricate their claims.
The most recent example of this phenomenon is an attack orchestrated by Hindenburg Research, a notoriously aggressive short seller, on the Adani Group, an Indian multinational run by Gautam Adani, the 24th wealthiest person in the world. Accusing Adani of “pulling the largest con in corporate history,” Hindenburg claimed the company fudged compliance with minimum shareholding requirements, engaged in price manipulation, and circumvented a consortium of regulations.
These wild allegations made Adani’s businesses lose over $100 billion in valuation and even sent shivers down the spine of some investment firms. However, a detailed analysis released by an India Supreme Court appointed committee last week found no signs of regulatory failure or price manipulation. As a result, Adani’s stock price has started to recover but not before thousands of investors lost millions on the altar of what might have been a misinformation campaign. That’s not as egregiously flabbergasting as a Pentagon bomb faking, but for many traders, it is explosive.
From fake AI-generated images to good old-fashioned Internet mud-slinging, regulators and market participants are grappling with the challenge of addressing these emerging threats. While the Securities and Exchange Commission has stepped up its efforts to monitor and regulate social media platforms and online communication channels to detect and prevent market manipulation, more needs to be done.
Increased collaboration between regulatory bodies, technology companies, and financial institutions will prove essential to stay ahead of manipulative tactics. Furthermore, investors should consider incorporating technology-driven solutions into their investment strategies to mitigate the risks associated with market manipulation.
Artificial intelligence and machine learning algorithms can analyze and filter news and social media data, identifying potential fake news or manipulation attempts. By leveraging these technologies, investors can make more informed decisions that are based on reliable and verified information rather than rhetoric.
Education and awareness are also vital components of combating market manipulation. Investors should stay informed about the latest trends in fraudulent activities and familiarize themselves with the techniques used by manipulators.
Whether driven by malicious intent, opportunistic profit-seeking, or pranks, market manipulation poses a significant risk to the market's integrity. By embracing technology, regulatory measures, and personal due diligence, investors can enhance their ability to navigate these hazards and make informed investment decisions.
Michael Busler is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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