There are numerous quotes about how knowledge is power. But is it possible to ‘know’ too much, especially in this era when news and views are widely available? As the American sociologist Robert Staughton Lynd said: “Knowledge is power only if man knows what facts not to bother with.”
That neatly sums up a recent working paper by researchers at Oxford University. This discussed the way ‘stale news’ posted on Twitter led to market volatility. It stated that market participants aren’t that rationale when it came to processing information, and that in many cases they were unable to recognise even when ‘news’ was old.
“Twitter almost by definition stirs up repetition. People perceive old information as fresh. If everyone knew it was repeated stuff, the market wouldn’t react as much,” Bloomberg quoted the co-author of the report, Ansgar Walther, as saying.
This has always been the case. Anyone involved in financial markets will have seen gyrations caused by an old story. For instance, a newspaper report may have no impact when published in Asia. But when it’s regurgitated in early European trading, sharp moves occur. This ‘problem’ is getting worse for numerous reasons.
Let’s go back in history. In the 1980s, an upstart news service had the temerity to challenge Reuters’ FX hegemony. It soon got a decent following, as it seemed to often report the sometimes spurious reasons why markets were moving. Reuters’ sniffy response was to reply that it only reported fact, not rumour.
That worthy but anachronistic stance has altered and market participants have grown used to reacting to ‘buzz’. According to the report mentioned above, buzz is a specific metric to quantify news coverage of specific stocks. “The measure is defined as the number of articles in conventional news outlets or social media posts devoted to a given stock, relative to other companies,’ says Bloomberg.
Anecdotal evidence suggests that because of the clampdown on sharing buzz, FX and other markets have moved into what is effectively an information black hole. It is simply not possible for any individual to read, absorb and analyse the vast amount of information that is produced on not only a daily, but hourly and even minute by minute basis. That was true even before the advent of social media.
Clearly, being well informed will not prevent a market moving erratically. But it may present good trading opportunities, such as fading a false move.
Being well informed alone is potentially a massive business differentiator. Being able to keep clients informed is becoming a game changer. But the issue is that many financial institutions are now so paranoid that they are unable to make logical decisions about how they should communicate with clients.
In the short term, this may get worse. Everyone should know how MiFID II will impact the treatment of Research. There was an audible sigh of relief when MiFID II’s introduction was postponed until 2018. More pressing though is Mad Mar. This is not a new film about a post-apocalyptic wasteland staring some beefcake actor and a grungy piece of eye candy, but the Market Abuse Regulation that comes into place in Europe in July.
This will probably also impact market commentary, although it’s hard if you’re not a regulatory lawyer to precisely define how. What seems clear is that it will lead to more record keeping, box ticking and perhaps also impact on what market colour is allowed to be given and how that is recorded. There are new rules about disclosing if you are in the possession of insider information. It seems that writing something like, “USDJPY looks bid”, could be a problem if you have an order to sell a net half a yard at the 4pm fix.
It almost sounds like the death knell for the provision of market commentary is sounding. But the wise will realise that information can still be collated and shared, at least if it is done so in a legally approved and compliant manner.
Off-the-shelf packages are evolving that allow controlled and measured distribution of content. For many financial institutions, that may well seem sufficient, especially the ones with the intellectual confidence (or arrogance?) to believe that they know how to run a publishing news/service.
But the smarter ones will realise that just as almost anyone could in theory price up an option or structure, it often takes something extra to clinch the deal. That something could be likened to a sprinkling of fairy dust. Feel free to call me if you want to know how to do it.