Nerds on Wall Street: Math, Machines, and Wired Markets

11.7. The Internet Era: A Manipulator's Paradise

The world moves a lot faster today. There are over 250 million people on the Internet, and more than a billion web pages (billions more if you count the ones below the surface). This is the democratization of information. Information that used to be difficult and expensive to find is widely available for low cost or no cost. Entirely new information sources are appearing. Millions of people can see and act on items of information in a hurry. For the market manipulator, this means greater access and greater impact by posting rumors anonymously on Internet message boards.

Can messages move a stock? Anecdotally, we see extraordinary events like the NEIP 106,600 percent jump. But is that evidence that far less malicious intent can move stock prices? Even unusual message traffic volumes have been shown to do this. "Cheap Talk on the Web,"^[] mentioned in the previous chapter, is a formal academic analysis of message volume by Peter Wysocki, then at the University of Michigan business school. It's based purely on traffic analysis, just counting messages. This is the earliest form of electronic intelligence gathering, dating back to World War II. Wysocki's key finding was that, after adjusting for earnings and dividend events and for market returns, the outlier events in message volume had statistically significant predictive value in forecasting subsequent excess return and subsequent volatility.

If messages can move markets, the modern ...