misterfergusson

Manipulated Social Media And The Stock Market

Earlier this year, Elon Musk tweeted that the Tesla stock price is too high. His twitter account had a reach of 33.4 million followers (41 million as of this writing). The immediate impact on Tesla’s stock price was a midday trading deficit of 9% compared to the closing stock price of the previous day. Tesla’s company valuation suffered an estimated loss of $14 billion. The episode triggered concerns over a potential violation of his 2018 settlement with the Securities and Exchange Commission after misleading tweets implying to have raised sufficient capital to take Tesla private. Presumably this time it was in response to California’s restrictive shelter-in-place lockdown measures to tackle the coronavirus pandemic. Maybe Elon Musk felt the weight of his responsibilities weigh twice as much during these challenging times. In any case, as an investor, his actions made me think of the power of social media at the hands of a social media influencer (i.e. stock promoter). Moreover, it made me think about content policies tailored to protect economic value while safeguarding information integrity. This empirical study conducted by researchers of the Pantheon-Sorbonne University discusses effects of illegal price manipulation by way of information operations on social media, specifically Twitter.

tl;dr

Social media can help investors gather and share information about stock markets. However, it also presents opportunities for fraudsters to spread false or misleading statements in the marketplace. Analyzing millions of messages sent on the social media platform Twitter about small capitalization firms, we find that an abnormally high number of messages on social media is associated with a large price increase on the event day and followed by a sharp price reversal over the next trading week. Examining users’ characteristics, and controlling for lagged abnormal returns, press releases, tweets sentiment and firms’ characteristics, we find that the price reversal pattern is stronger when the events are generated by the tweeting activity of stock promoters or by the tweeting activity of accounts dedicated to tracking pump-and-dump schemes. Overall, our findings are consistent with the patterns of a pump-and-dump scheme, where fraudsters/promoters use social media to temporarily inflate the price of small capitalization stocks.

Make sure to read the full paper titled Market Manipulation and Suspicious Stock Recommendations on Social Media by Thomas Renault at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3010850

Social media platforms are an accepted corporate communication channel nowadays closely monitored by investors and financial analysts. As an investor, social media offers swarm intelligence on trading the company’s stock, access to real-time information about the company, product updates and other financially relevant information. Large and small-cap companies usually maintain a presence on social media. Although in particular small-cap companies with low liquidity are vulnerable to stock price manipulations by way of information operations on social media. According to researchers of the Pantheon-Sorbonne University an information-based manipulation involves rumors, misleading or false press releases, stock analysis or price targets, etc. that is disseminated in a short, time-sensitive period. Nearly 50% of this disinformation is spread by an influencer. The investment terminology calls this pump-and-dump scheme:

“Pump-and-dump schemes involve touting a company’s stock through false or misleading statements in the marketplace in order to artificially inflate (pump) the price of a stock. Once fraudsters stop hyping the stock and sell their shares (dump), the price typically falls.”

The empirical study collected tweets containing the cashtag ticker symbol of more than 5000 small-cap companies. Over an eleven-month period 248,748 distinct Twitter users posted 7,196,307 financially relevant tweets. They adjusted the data for overoptimistic noise traders and financially relevant news reporting. They found a spike in volume of tweets concerning a company’s stock on social media correlates with a spike in trading of the company’s stock from two days before peak activity on social media up to five days after it. Some content concerned positive financial signals advocating to buy the stock. Other content concerned disinformation about the company’s performance. It was spread to a large, unsophisticated Twitter audience by influencer in concert with a network of inauthentic accounts and bots. This was then followed by a price reversal over the ensuing trading days. In the aftermath, the actors part of the scheme went into hibernation or ceased social media activity altogether.

Risk And Opportunity For Social Media Platforms

Information operations to manipulate stock price are quite common on social media. Albeit hard to detect only few are investigated and successfully prosecuted. Consumers exposed to stock disinformation that fell victim tend to exit the stock market altogether. Moreover a consumer might reduce their footprint on social media after experiencing real-world financial harm. Depending on the severity of the loss incurred, this might even lead to litigation against social media platforms. The tools leveraged by bad actors undermine the integrity efforts of social media platforms, which in some cases or in conjunction with class-action litigation can lead to greater scrutiny by financial watchdogs pushing for tighter regulations.

To tackle these risks social media platforms must continue to expand enforcement of inauthentic coordinated behavior to eliminate botnetworks used to spread stock disinformation. Developing an account verification system that is dedicated to financial professionals, analysts and influencers will support and ease enforcement. Social media platforms should also ease onboarding of publicly traded companies to maintain a presence on social media. This decreases the effects of collateral price reversals. In order to mitigate stock disinformation social media platforms must develop content policies tailored to balance freedom of expression including price speculation with the inherent risk of market-making comments. The latter will hinge on reach and engagement metrics but also on detailed definitions of financial advice and time and location of the content. Here, a close working-relationship with watchdogs will improve operations. Added friction, for example an interstitial outlining the regulatory requirements before posting or a delayed time of posting or certain labels informing the consumer of the financial risks associated with acting on the information in the posting. There are obviously more measures that come to mind. This only serves as a start of a conversation.

So, was Elon Musk’s tweet “Tesla stock price too high imo” an information-based market manipulation, a market-making comment or just an exercise of his free speech?

Understanding America

When I first arrived in New York City, this most portrayed American city appeared intimidating with its never-ending concrete jungles, incessant traffic and an overwhelmingly fast-paced populace. It made me wonder, is this the land of the free? Is this what America is like? Fast-forward a couple decades when the United States finds itself polarized, divided and void of compassion, insecure about its future. In times like these, I was looking for its identity. An identity forged by openness not oppression. A dear family member recommended reading “Travels with Charley in search of America” by John Steinbeck. It would become a starting point of how we got here.

Steinbeck’s travelogue is comprised of simple ingredients: a man and his best friend, a three-quarter-ton pick up truck, and the wide and open roads of America. His best friend, a poodle named Charley is a main character in this non-fiction novel. His pick up truck Rocinante loads a little camper designed for housing. The duo is road tripping across rural America, sleeping wherever Rocinante finds a parking spot and a theme of this philosophical journey is to engage strangers in conversation over a cup of coffee. While this adventure takes place in the America of the 1960s, it is somehow a timeless reflection of America’s soul. In somber passages, Steinbeck describes the struggle of Black Americans for equality. In more uplifting parts, he paints an American identity imbued in the spirit of tall, green Sequoias, who have seen all of history’s main events – free of discrimination. It’s a book about America, the beautiful, the ugly and the never-finished. Much as Steinbeck didn’t know his country in the 1960s, I don’t know my country in the 2020s:

“I did not know my own country. I, an American writer, writing about America, was working from memory, and the memory is at best a faulty, warpy reservoir. I had not heard the speech of America, smelled the grass and trees and sewage, seen its hills and water, its color and quality of light. I knew the changes only from books and newspapers. But more than this, I had not felt the country for twenty-five years. In short, I was writing of something I did not know about”

Nevertheless, acknowledging a lack of knowledge is the first step in learning. “Travels with Charley in search of America” is an important piece of American literature. Its authentic historical account, its poetic beauty and the felt tragedy that is this great American democracy live on in our generation. What will we learn from it?

The Nuclear Option in Cyberspace

Stuxnet was a malicious computer worm that caused substantial damage to Iran’s nuclear program. It was likely deployed to prevent a conventional military strike against Iran’s nuclear facilities. The 2015 cyber attacks on Ukranian critical infrastructure caused loss of energy for hundreds of thousands citizens of Ukraine in December. It was likely staged to test cyber operations for the upcoming 2016 U.S. presidential election. Both cases offer interesting takeaways: (a) offensive cyber operations often empower rather than deter an adversary and (b) offensive cyber operations resulting in a devastating cyber attack to the integrity of the target may be responded via conventional military means. But where exactly is the threshold for escalating a cyber attack into conventional domains? How can policymakers rethink escalation guidelines without compromising international relations? This paper discusses achieving strategic stability in cyberspace by way of transferring the concept of a nuclear no-first-use policy into the current U.S. cyber strategy.

tl;dr

U.S. cyber strategy has a hypocrisy problem: it expects its cyberattacks to deter others (defend forward) without triggering escalatory responses outside cyberspace, while it is unclear about what it considers off-limits. A strategic cyber no-first-use declaration, like the one outlined in this article, could help solve risks of inadvertent instability while allowing cyber-operations to continue.

Make sure to read the full paper titled A Strategic Cyber No-First-Use Policy? Addressing the U.S. Cyber Strategy Problem by Jacquelyn Schneider at https://www.tandfonline.com/doi/full/10.1080/0163660X.2020.1770970

In 2018 the Trump administration adopted its progressive National Cyber Strategy. These sort of policy declarations are commonly filled with agreeable generalities, albeit this National Cyber Strategy read in conjunction with the 2018 Department of Defense Cyber Strategy introduced a new, rather reckless cyber posture of forward attack in cyberspace as a means of a preemptive cyber defense. Key themes, e.g.

Using cyberspace to amplify military lethality and effectiveness;
Defending forward, confronting threats before they reach U.S. networks;
Proactively engaging in the day-to-day great power competition in cyberspace;
Actively contesting the exfiltration of sensitive DoD information;

raise important questions of national security. Why does an industrial superpower like the United States feel a need to start a cyber conflict when it could redirect resources toward building effective cyber defense systems? How many cyber attacks against critical U.S. infrastructure are successful that it would justify a forward leaning cyber defense? What is the long-term impact of charging the military with cyber strategy when the private sector in Silicon Valley is in a much better position to create built-in-cybersecurity and why aren’t resources invested back into the economy to spur cyber innovation? Each of these questions is material for future dissertations. Until then, instead of a defend forward strategy in cyberspace, a cyber policy of no-first-use might complement securing critical infrastructure while ensuring allies that the U.S. cyber capabilities are unmatched in the world and merciless if tested.

No-first-use is a concept originating in the world of nuclear warfare. In essence, it means

“a state declares that although it has nuclear weapons, and will continue to develop and rely on these weapons to deter nuclear strikes, it will not use nuclear weapons first.”

Instead conventional (non-nuclear) warfare will be utilized to respond to attacks on its sovereignty. These policies are not treaties with legal ramifications if violated. They’re neither agreements to ban production of certain weapon systems nor intended as arms control measures. In fact, no-first-use policies often take shape in form of a public commitment signaling restraint to friends and foes. They are made for strategic stability in a given domain.

No-First-Use Cyber Policy

Taking the no-first-use concept to cyberspace may be a national security strategy at low cost and high impact. Cyberspace is by its configuration transient, hard to control, low cost of entry and actor-independent. For example, a web crawler is at times a spiderbot indexing websites for search engines to produce better search results. At another time the same web crawler is configured to recon adversary cyber infrastructure and collect intelligence. Yet another time, the tool may carry a malicious payload while scraping website data. This level of ambiguity introduces a wealth of cyber policy hurdles to overcome when drafting a no-first-use cyber policy. Schneider recommends starting with distinguishing the elements of cyber operations in its strategic context. As mentioned before some actions in cyberspace are permissible, even expected, other actions using the same technology, are not. Now, there is no precedence for a cyber operation to be so effective at scale that it would compromise its target (state) altogether. For example, no known cyber operation has ever irreparably corrupted the energy infrastructure of a state, destroyed social security and health data of its citizens and redirected all government funds, bonds and securities without a trace or leaving the state in a position unable to respond within conventional warfare domains. This means the escalation risk from a cyber operation against critical infrastructure is lower in cyberspace compared to an attack with conventional weaponry. Therefore a successful no-first-use cyber policy must focus on the cyber operation that produces the most violent results and is effectively disrupting a conventional defense (by disrupting critical infrastructure).

Another consideration for an effective no-first-use cyber policy is the rationale of continued development of cyber capabilities. A no-first-use cyber policy does not preclude its parties from actively testing adversaries’ cyber vulnerabilities; it only bars them from exploiting such weaknesses unless the adversary strikes first.

A strong argument against adopting a no-first-use cyber policy is diplomatic appearances. First, it might signal a weakness on part of U.S. cyber capabilities or indicate to allies that the U.S. will not commit to protecting them if under attack. Second, it may also result in hypocrisy if the U.S. launches a first strike in cyberspace after political changes but is still bound to a no-first-use policy. For Schneider a successful no-first-use cyber policy

“credibly convinces other states that the U.S. will restrain itself in cyberspace while it simultaneously conducts counter-cyber operations on a day-to-day basis.”

She also recommends strategic incentives through positive means: information sharing, foreign aid or exchange of cyber capabilities. The end goal then ought to be strategic deterrence through commitments in cyberspace to restraint high-severity cyber attacks.

I found the idea of a no-first-use cyber policy captivating, albeit inconceivable to be implemented at scale in cyberspace. First, even though cyber operations with the potential to blackout a state are currently reserved for professional militaries or organized cyber operators in service of a state-actor, I don’t believe that a lone non-state actor is not capable of producing malicious code with equal destructive powers. Second, I see attribution still as a roadblock despite improving cyber forensics. Any democracy would see the hypocrisy of mistakenly engaging a non-state actor or the risk of misidentifying a state-actor as perpetrator. Moreover, the current state of attribution research in cyberspace is considering humans with certain intent as foundation when future cyber conflict may be initiated by a rogue or faulty autonomous weapon system under substantial control of an artificial intelligence. Third, any policy without legal or economic ramifications isn’t worth considering. An effective deterrence is hard to achieve without “skin in the game”. Perhaps an alternative to a no-first-use cyber policy would be a first-invest-into-cyber defense policy. Emulate the Paris Climate Accord for cyberspace by creating a normative environment that obligates states to achieve and maintain a minimum of cybersecurity by investing into cyber defense. This way constant innovation within the private sector reduces vulnerabilities, which will lead to a self-sustaining deterrence.

Ballistic Books: Space Exploration

Elon Musk’s SpaceX has redefined space exploration. Jeff Bezos Blue Origin is in a close second of a Billionaire Space Race. These efforts to elevate humanity made me wonder about our place as humans in this universe but perhaps more importantly where we will venture in the future. Now, I have no solid knowledge of physics, math or science fiction. Like many, I dreaded these subjects in school. It’s reason enough to challenge myself. One book is a must-read for me, Astrophysics for People in a Hurry, for I am a great admirer of the works of Neil deGrasse Tyson. A Brief History of Time sort of made the list because it was written by Stephen Hawking, who is synonymous with both endless possibilities and making sense of our universe. From here I will rely on colleagues’ recommendations. The Future of Humanity seems to offer answers to my pressing questions: when will humanity leave earth? What will human life in the universe look like? Aside from this Michio Kaku appears to be a great lecturer. Lastly, Until The End of Time by Brian Greene strikes me as a perfect conclusion of elevating my mind into these far-fetched, astronomical Gedankenexperiments .

Ballistic books is a series to present literature of interest. Each edition is dedicated to a specific topic. I found it challenging to discover and distinguish good from great literature. With this series, I aim to mitigate that challenge.

1. Astrophysics for People in a Hurry by Neil deGrasse Tyson

Neil deGrasse Tyson is an Astrophysicist, Frederick P. Rose Director at the Hayden Planetarium and host of StarTalk. You can find Neil deGrasse Tyson on Twitter at @neiltyson

2. A Brief History of Time by Stephen Hawking

Stephen Hawking was a theoretical physicist and director at the Centre for Theoretical Cosmology at the University of Cambridge. Hawking’s research enabled the study of black holes. His life inspired many people and was portrayed by Hollywood in The Theory of Everything in 2014. You can learn more about Stephen Hawking’s fascinating life and research at https://www.hawking.org.uk/

3. The Future of Humanity: Our Destiny in the Universe by Michio Kaku

Michio Kaku is a theoretical physicist and a professor of theoretical physics at the City College of New York and CUNY Graduate Center. He is known for his research on string field theory. Kaku brought astrophysics to a broad audience through frequent television appearances, public events and is the author of many popular books on space exploration. You can find Michio Kaku on Twitter @michiokaku

4. Until The End of Time by Brian Greene

Brian Greene is a theoretical physicist, string theorist and a professor at Columbia University. Greene made some groundbreaking discoveries in his field, which I fail to grasp yet and won’t pretend to understand by listing them here. He recently went on the Joe Rogan Podcast, which offers a glimpse into his, our universe. You can find Brian Greene on Twitter @bgreene

Trump’s Grand Strategy

Legacy matters these days. As President-elect Joe Biden is about to take office I thought it is worth my while to reflect on America’s leadership role in the world. How did Donald Trump fare with international relations? What happened to the immigration ban and withdrawal of U.S. military overseas? Is the world safer because of Trump’s ‘America First‘ rhetoric? This paper sheds light on the contrasting ideologies that governed U.S. foreign policy under Trump.

tl;dr

When a new President is elected in the United States, the first thing analysts do is define that President’s grand strategy; yet, naming Donald Trump’s grand strategy was a difficult task as his pre-election speeches often contradicted traditional US foreign policy norms. Trump’s ambiguous grand strategy combines two US foreign policy strategies: nationalism in the sense that his preference is for unilateral policies prioritising American interests, and a traditional foreign policy approach, as seen in the moves taken against China and Iran. Surprisingly, this grand strategy unintentionally contributes to cooperation in Eurasia, as actors like Russia, China, Turkey, India and the European Union continue to try to balance the threat from the United States instead of competing with each other, while smaller countries are reluctant to challenge the regional powers due to mistrust towards Trump.

Make sure to read the full paper titled Mixing Grand Strategies: Trump and International Security by Murat Ülgül at https://www.tandfonline.com/doi/full/10.1080/03932729.2020.1786928

When Donald Trump assumed office as 45th President of the United States the world was facing a known unknown. A mercurial real-estate developer and reality show entertainer was suddenly in a position to reshape America’s international relations. Until then, Trump’s political record consisted of commentary on current affairs and one failed attempt to run for President in 2000. His business record was strained with few successful real estate developments in New York City and a number of unsuccessful business ventures in different industries.

Historically U.S. foreign policy is set by the President. Entire presidencies rested on a sophisticated strategy to secure American interests at home and abroad. Following WWII the United States adopted a foreign policy of primacy, which according to Patrick Porter branches into a grand strategy of

Military preponderance
Allied relationships
Proliferation of U.S. capitalism
Absolute control of nuclear (power) weapons

However Trump’s world views stand in stark contrast with that of previous administrations. His nationalistic rhetoric of ‘America First’ struck a chord in harmony with authoritarian dictatorships. It created concerns among democratic nations whether President Trump would continue to invest into alliances and build amicable relationships or if he would lead the United States into isolationism. His chaotic leadership style had many scholars speculate whether Trump would recognize the power imbalance between America’s allies and Russia or China. It raised questions whether Make America Great Again rhetoric meant a complete withdrawal from the international stage and mark a pivot point in America’s pursuit of primacy as its grand strategy.

“Grand strategy can be defined as a great power’s roadmap to realising its long-term objectives with its actual and/or potential resources”

In this paper, Murat Ülgül reframes the analysis of Trump’s grand strategy by focusing on the complementary elements of a nationalist traditionalism rather than its competing positions. Unlike other scholars have suggested, Trump’s grand strategy is not exclusive continuity of previous “business as usual”. Albeit divisive in rhetoric throughout his pre-election years and time in office, his grand strategy cannot be viewed as raw isolationism. Moreover Ülgül makes a case for a combination of nationalism and traditionalism. Nationalism can be observed in the character and image of Donald Trump himself. Traditionalism leaves its mark in Trump’s choices for his national security advisors, e.g. Michael Flynn, H. R. McMaster and John Bolton, which had gained significant influence over Trump throughout the course of his presidency. This unique but ambiguous combination appears to mitigate the negative effects of each individual strategy. Both are conflict-prone strategies yet the rate of international conflicts has steadily decreased during Trump’s tenure. America First has led the United States to a delayed or complete disengagement from international contests. All the while his administration is running a traditional, hawkish narrative that has led foreign powers known for the pursuit of authoritarian objectives to cooperate and resolve their disagreements with America’s allies against a potential fallout from the United States. In other words, the administration continues to influence global policy without military leverage or engagement. Nevertheless its impact is waning. As a result of this grand strategy, the United States has suffered some reputational damage for fewer countries retained faith into America’s ability to manage international relations or to be a beacon of democracy.

While this paper goes into more depth than I can summarize here, I found this idea of a mixed grand strategy not as new as the paper suggests. Prior to WWII, the United States practiced a calibrated offshore balancing. In 2016, Stephen Walt suggested a deliberate withdrawal from conflict areas in favor of an intentional engagement of strategic partners. Walt’s propositions imply an element of deliberation of U.S. foreign policy which never seemed to register with Trump, but it helps in finding Ülgül’s argument even more convincing. It further helps to see some positive from this oddball presidency as he disappears from the international (relations) stage.