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Has the new Twitter certification mechanism impacted financial misinformation?

In the days following Elon Musk's takeover of Twitter, many decisions were made by the company's CEO. The dismissal of half of the employees, the modification of the moderation rules, or the new certification mechanism has been widely covered in the press. Why and how can these changes impact financial players?

A look at the events surrounding Twitter

"The bird is free", were the words used by Elon Musk on October 28th to make official the takeover of Twitter, which took place the day before, six months after revealing his intentions, and after months of delaying tactics, particularly about the rate of fictitious accounts, driven by bots on the social network. Throughout this period, questions emerged from the press as well as from political and financial circles about the network's moderation policy under the Musk era. Indeed, the businessman has repeatedly accused the platform of restricting free speech, going so far as to declare during the TEDx conference in Toronto on April 14th, 2022 that "If in doubt, let the speech exist... if it's a grey area, let the tweet exist".

In effect, the acquisition of Twitter immediately led to the dismissal of three executives, CEO Parag Agrawal, CFO Ned Segal, and Vijaya Gadde, who served as head of public and legal affairs. A week later, the entire workforce received an email informing them that a wave of layoffs was imminent for half of the almost 7,500 employees, which worried both observers and advertisers of the platform. Indeed, while Elon Musk claims that nothing is changing with content moderation, the introduction of Twitter Blue in the United States, which allows users to obtain a certification badge for $8 per month, has caused panic in the face of the proliferation of fake accounts that forge those of personalities or organizations. Twitter's response was to roll out another "official" badge on Tuesday, November 8th, which disappeared the next day, further fuelling confusion on the social network. On Friday, November 11th, the Twitter Blue service was suspended "to resolve usurpation issues", according to an internal memo relayed by France Info.

The episode we are witnessing financially impacts the already loss-making social network. In the wake of its takeover by Elon Musk, major brands have decided to suspend advertising on Twitter, the platform's main source of revenue. This is to protect their names from misinformation, fearing further announcements about moderation. According to the Wall Street Journal, the Volkswagen group, which owns a multitude of brands including Audi, Porsche, and Lamborghini, the food giant General Mills, and the Balenciaga brand have already announced the withdrawal of the platform from their communication channels to protect their brand reputation.

Assuming that the social network has taken the measure of the situation, the financial damage caused by this episode is already measurable and impacting many companies. Have financial players realized the absolute necessity to protect themselves from financial misinformation?

What influence does Twitter have on the financial markets?

Firstly, Twitter is a social microblogging platform, with 237.8 million daily users in Q2 2022, where individuals publish posts that express a mood, opinion, analysis, or share third-party content of any format, from web pages to videos to podcasts. This flow of posts is massive, with an average of 9120 tweets shared every second, and it is important to note that in the US, 80% of tweets come from the top 10% of accounts. Thus, Twitter is a place where opinions are mostly exchanged, which can be defined as a "judgment, opinion, feeling that an individual or a group expresses on a subject, facts, what they think" according to the Larousse French dictionary. Unlike the traditional media, the information (or opinions) shared on Twitter or any other social network are immediate and their reliability is, by nature, much more uncertain, as they come from a wide variety of agents (institutions, companies, individuals, or activists).

It should be noted that since 2013, the SEC (Security and Exchange Commission), the American financial markets regulator, has authorized listed companies to publish their financial communications, such as quarterly results, on Twitter. The use of the network as a financial information tool has increased over the last ten years and two trends in usage are emerging. The first is that Twitter is used as an aggregator to follow the publications of financial authorities, news agencies, analysts, and companies. The second trend is that the network has become a forum, a public place where different types of actors exchange their opinions.

This is the conclusion drawn by finance researchers Chen Gu and Alexander Kurov, authors of the study The Informational Role of Social Media: Evidence from Sentiment on Twitter, published in the Journal of Banking and Finance. In an interview with his West Virginia University website, Kurov confirms that "academic research in finance generally shows that investor sentiment tends to be driven by investor beliefs or feelings that are not justified by fundamentals, such as the facts and rational expectations that should determine the value of a stock" before adding that his "results show, however, that Twitter sentiment contains relevant information that is not yet reflected in stock prices."

While the most sophisticated investors have more sophisticated tools at their disposal than neophytes, the SEC remains vigilant about the use of social networks for financial purposes. As early as 2014, it warned of the risks of fraud inherent in their use by investors, particularly Facebook, YouTube, Twitter, and LinkedIn. Stressing the central role of the latter in order to "research particular stocks [...] learn about the latest news or simply discuss the markets with others" and acknowledging that "social media have become an essential tool for American investors", the SEC nevertheless stresses that "while social media can offer many benefits to investors, they also offer opportunities for fraudsters."

In this press release, the American authority lists the situations that should alert the potential investor. Messages (often unsolicited) that promise much higher than average returns or that claim that the investment in question is risk-free should attract the immediate vigilance of the recipient. Also, "affinity fraud" is common on social networks. This scam is based on sharing an investment opportunity by a trusted third party to a group, such as a religious community, professional group, or hobby group.

The SEC is particularly alert to the practice of pump-and-dump, which is a two-step scheme deployed by fraudsters to manipulate a stock price and then profit from it. The first stage, pump and dump consists of praising a company, and sharing false information (misinformation) or misleading information (misinformation) on a massive scale to inflate its stock price. Once this objective has been achieved, the fraudsters stop praising the stock and sell the ones they hold, causing the price to fall.

While this process is not new, social networks provide fertile ground for it. Aided by anonymity, it is easy to create fake accounts, or even bots, capable of massively disseminating information to a large number of potential investors. Those who discover investing on social networks are particularly exposed to these manipulations. While these practices have been little studied until now, the study Who is the prey of the wolf of Wall Street? Investor Participation in Market Manipulation, published in 2018, provides some statistical evidence. Based on 421 cases in Germany between 2002 and 2015, the paper establishes that 6% of investors were involved in at least one pump and dump, resulting in considerable losses for the participants of around 30%.

In another study, Market Manipulation and Suspicious Recommendations on Social Media, taken up by the French Financial Markets Authority (AMF), its author, Thomas Renault, also looks at the case of "pump-and-dump" in the US. He establishes that small caps, traded on over-the-counter markets, are the most likely to be manipulated. By tracking the ten most discussed stocks on Twitter between October 2014 and September 2015, the study defines that the stocks targeted by this manipulation increased abnormally by +4.10% the day before the event (the beginning of the pumping phase) and by +6.88% on the day of the event, i.e. the day the misinformation begins. In the five days following the event, stocks lose on average of 3.11%.

Why does basing account certification on a payment encourage misinformation?

By introducing a new principle of certification, which is not based on profession, legitimacy, or the ability to address a specific audience, but on a pure and simple purchase, the very name of certification is called into question. If the classic operation could be improved, it allowed the user to identify a company, an opinion leader, or a journalist at a glance, without having to check the user name. However, with the new "certification" policy deployed by Twitter, we have witnessed for one week a plethora of misinformation, often crude and identified as such, some of which have stirred up the financial markets, with massive financial consequences.

In two separate tweets, the stock market valuations of Eli Lilly and Lockheed Martin shook. On Thursday, a "certified" account via Twitter Blue spoofing the identity of the world's tenth largest pharmaceutical company, based in Indianapolis, U.S.A., posted a tweet, "We are happy to announce that insulin is free now." After staying online for several hours, reposted nearly 2,000 times, and being liked by about 15,000 accounts, the fake tweet caused a significant 6% drop in the stock price, a loss in valuation of about $20 billion. Despite the emergency apology posted by Eli Lilly's real account, the stock had not regained its initial level by the close of the New York Stock Exchange (NYSE), settling at $352.30 from $368.36 on Thursday, a decline of almost 4.4%. Beyond these direct losses, this episode has reignited the debate on the price of insulin, which is hovering around $100 in the United States even though Frederik Banting, its inventor, donated the patent for a symbolic dollar, declaring: "Insulin does not belong to me. It belongs to the world." An area of stock market turmoil spread to two other major insulin players, Novo Nordisk, which lost 4.25% on Friday, and Sanofi, which fell 5.22%.

Another tweet this time jostled the leading defense industrialist, Lockheed Martin. Also on Thursday, November 10th, another account, also certified by Twitter Blue, tweeted after the NYSE closed, "We will begin halting all arms sales to Saudi Arabia, Israel, and the United States until further investigation is conducted into their record of human rights violations." As an immediate result, the stock was losing $10.77 before the market even opened on Friday and just over $27 on the day, a 5.48% drop on a capitalization that exceeds $129 billion.

How can Buster.Ai prevent misinformation on social networks?

Social networks have become channels of communication and information in their own right, as Elon Musk attests when he states in a tweet that "Twitter must become by far the most accurate source of information about the world. That's our mission."

Therefore, while companies cannot act directly on sharing misinformation, they can adopt the tools to guard against the resulting consequences to avoid losses that could be measured in billions of dollars.

These protective measures involve monitoring social networks, trends, and mentions that involve the company, as well as analyzing their evolution to anticipate posts that are likely to go viral.

To do this, Buster.Ai develops solutions based on artificial intelligence, capable of reading, performing semantic analysis, and text comparison, in order to deploy powerful monitoring by API. These solutions will allow us to reconcile statements and rumors with factual elements from research, press releases, or media.

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Sources of the article:

Report:

Informational Role of Social Media: Evidence from Twitter Sentiment - Chen Gu and Alexander Kurov
How a Company’s Tweets Impact Its Stock Prices - Temporarily and Permanently - Maryland Smith Research

What's going on at Twitter:

Eli Lilly case:

Lockheed Martin case:

https://www.boursorama.com/cours/LMT/

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