Manipulating The Facts

The lack of financial sophistication of so-called business journalists astounds me sometimes, particularly when they come from a reasonably credible publication like Business Week. This week Heather Green analyses a new finance blog concept by AOL called Blogging Stocks. Blogging Stocks is, as Green explains well enough, "a unique idea. AOL hired bloggers to write about product announcements, earnings releases, and commentary on 8 stocks initially. On its first day, the network will do live blogging of the Microsoft earnings call, for instance. (Good luck!)" This is interesting news, and worthy enough of publication.

But then Green launches into a bizzare analysis of conflict-of-interest ethics at the new blog:

So, what about the $64,000 question? Can the bloggers hold the stocks they are writing about?

Indeed. In fact, AOL encourages them to be stockholders, if not necessarily in the companies they're writing about. The key is that they have to sign a code of ethics, disclose their holdings and not trade on insider information, says Marty Moe of AOL Money & Finance.

Here's where my old school training kicks in. Different media outlets have different policies. But it's verboten for me to cover a company in which I have stock or that my family has stock in.

And yet....this is a new world. It's up to people following these blogs to decide whether they feel any stock manipulation is happening in the comments. That's like newsgroups already out there. But AOL will also be monitoring its bloggers, which is different and adds a need for a level of skeptism, I think.

This is not the first time a Business Week journalist, or even a professional business journalist for that matter, has posed the question of potential stock touting and market manipulation on behalf of bloggers.

There is a good reason AOL don't particularly care whether the writers for their new blog hold shares they are promoting, and that is that it would be impossible to manipulate most of them. Let me explain why.

Microsoft stock, for example, is bought and sold, on average, in quantities of between 59 million and 65.5 million shares a day, depending on whether your source is Yahoo or Google Finance. That figure equates to around between $1.4 and $1.6 billion worth of stock. Let's suppose then that one wanted to manipulate Microsoft stock through a blog post: assuming that a 10% increase in daily volume would move the stock up or down a few points (depending on whether your agenda was to encourage buying or selling), stock manipulation in this case would require parties who had read your post to cumulatively purchase or sell at least $150 million worth of Microsoft shares. Unless you're Jim Cramer or Barton Biggs, you'd be lucky to see someone part with $10,000 as a result of something you wrote about a share.

Which brings us to the next point made by those who claim that blogging may manipulate stock prices: suppose you hold a stock which has no volume, and you want to manipulate the price of it by encouraging a few punters to part with, say $5000 - $10,000. For a start, anyone remotely familiar with investing will look at this equity's daily volume and conclude that it's a dog, but even if they don't, the tout of the stock would never want their name  associated with it since it most likely is a complete dog and no one will ever listen to them ever again. Furthermore, even when did try to sell their own shares as a result of the price moving up on the back of their tip, they would be moving the price down by doing as and end up with pretty much what they paid for them.

Green's sensational conclusion that there "is a need for a level of scepticism" is just plain wrong: market manipualtion is nearly impossible if you have no name and no connections, and therefore not even worth speculating about. Business Week journalists ought to know this, and in the very unlikely chance they do not, should not be working there and writing about financial markets at all. It is, after all, about the most basic law of economics: supply and demand. Where this type of article looks sinister is in the fact that they are aware of this and are just trying to create sensationalism and hype to move stories: who, after all, is not interested in a story about AOL, market manipulation and blogs?

So how have message boards become instrumental in moving stock prices then? Not through ramping shares, but through the disclosure of genuine, secret insider information made on them that encourages buying in the stock, but that's a completely different thing altogether.