I am all for the punishing of rumors used to manipulate security prices. Just type in “rumor” in my blog’s search box and you’ll find my repeated complaints about the topic.
I’ve ripped on CNBC and “journalists” like Charlie Gasparino for reporting rumors and their effects on stocks and the market in general. Go ahead SEC - do something about that. OOOPS. Freedom of the press. I’ve complained about foreign newspapers tabloids reporting on M&A rumors that spiked prices until everyone found out the deal never happened. OOOPS. Jurisdiction and once again…freedom of the press.
I’ve ripped on anonymous rumors about “surprise” Federal Reserve rate cuts that ended up being true. Did the SEC investigate that rumor and who leaked it? Never heard about that one.
How about the rumors that fueled the Private Equity premium in hundreds of stocks during 2006 and 2007? I guess I missed anyone getting punished for those rumors by the SEC, but I didn’t miss how the market got punished when those premiums got removed later in 2007.
I cannot stand rumors, but they are a part of our business. They are used by politicians and regulators and leaked to calm the markets. I guess that is official business, so it must be okay.
Usually though, rumors are started by anonymous sources or people familiar with the matter and they take on a life of their own. Like the telephone game, a rumor can start out as harmless and a genuine belief and the more it gets passed around and retold, the more it becomes untrue and manipulative. So who is to blame? The originator or the thousand people in the rumor chain that added their own special interpretation?
And what do we do about “conjecture”? Many rumors are started on legitimate conjecture even though I don’t like it. For example, in the Private Equity nonsense, Wall Street analysts would come out with their lists of who would be acquired next. That was analytical conjecture which morphed into rumors spread as fact.
Where do you draw the line? Which rumors are acceptable and which ones are not? If it’s a small rumor that only affects a specific stock, is that worse or more manipulative than a general rumor that can move every stock and other asset classes? If a rumor is started and repeated that no one believes and does not affect prices, is that not worth punishing? If a rumor artificially raises prices, do we punish those or do we only attempt to punish rumors that cause losses for long-only investors, traders, and speculators?
Unfortunately, rumors are a big part of this business. They always have been. If you must have a policeman for every rumor that finds its way around the stock exchange or trading pits, our markets will not function. Hopefully, the SEC’s new threats about punishing rumors will make things better, but I doubt it. And no, that was not a rumor!
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These people don't believe in any underlying structure in the world which is reflected more or less accurately by economics, but believe that we construct the world with our ideas.
The Russian Communists operated under that illusion but their Potemkin village world collapse around their ears.
Let's hope the same thing doesn't happen here.