Cutting Through the Noise
Marketplaces need the best possible infrastructure and framework to incorporate social media monitoring into their surveillance programs.
Billions of people use social media regularly, and many spend hours a day on multiple sites and channels. Posts and comments can go viral quite quickly, and although generally, they’re harmless, some are not. In numerous cases, influencers have harnessed social media channels for market manipulation and fraud. That’s become a big challenge for surveillance teams tasked with keeping the markets safe for all investors.
How has social media been used for market manipulation?
To illustrate, social media has been misused to disseminate material nonpublic information. In 2018, for example, Tesla CEO Elon Musk tweeted that he was considering taking his electric vehicle company private at $420 per share, a substantial premium to its trading price at the time. He also said funding for the transaction had been secured, and the only remaining uncertainty was a shareholder vote. Tesla’s stock was halted initially, but the share price remained volatile for weeks after the event. Following an SEC investigation, Musk was fined and penalized for violating Regulation Fair Disclosure.
Online communities have pumped the prices of certain meme stocks to levels that were misaligned with the companies’ fundamentals. A notorious case involved Keith Gill, aka Roaring Kitty, an influencer on Reddit who encouraged followers to participate in a short squeeze in GameStop. The company’s shares surged 1600% at one point in January 2021. In the summer of 2022, meme stock communities pumped Bed Bath & Beyond to where it was up 314% for a short period before crashing back down. Other meme stocks included AMC Entertainment Holdings and Blackberry.
Additionally, there have been instances of individuals utilizing pump-and-dump schemes to manipulate exchange-traded stocks. In a case involving $100 million securities, eight social media influencers gathered a large following in stock trading chatrooms and encouraged their vast following to buy selected stocks. When share prices and/or trading volumes rose, the influencers sold their shares without disclosing their activities to their followers. The Securities and Exchange Board of India also recently investigated an instance of a pump and dump scheme involving the circulation of Bulk SMSs in five scrips with a buy recommendation to public investors.
Finally, celebrity influencers have misused social media to promote assets without disclosing the payment they received for their services. The SEC charged professional boxer Floyd Mayweather Jr. and music producer Khaled Khaled, known as DJ Khaled, in 2018, Kim Kardashian in 2022 and NBA player Paul Pierce in 2023 for this activity.
How can marketplaces incorporate social media monitoring into their surveillance programs?
So how can marketplaces incorporate social media monitoring into their surveillance programs? There’s so much noise in these channels that uncovering abusive schemes is like finding a needle in a haystack. Unless the surveillance team receives a tip, it has to manually go through thousands of posts to reach the exact post that is manipulative. In the meantime, perpetrators change their methods. For example, they use symbols, post pictures or write in a different spelling so they can’t be caught by search engines.
Data needs to be gathered to link suspect trades to a social media account. Sometimes the boundary of authority obstructs the process of gathering data and evidence. Another challenge is proving the intention behind the posts and presenting a clear case to show the individual has posted recommendations for the purpose of misleading investors.
How is Nasdaq incorporating social media monitoring into its market surveillance?
Nasdaq’s surveillance teams in the U.S. and Nordics have incorporated social media feeds into existing surveillance programs – monitoring for mention of stocks listed in the U.S. and Nordic markets. “Emotional data” on social media platforms worldwide is gathered and then analyzed, quantified and delivered as valuable intelligence to surveillance teams. Over time, manual and automated processes for scoring author statistics, finding the first poster and frequent posters and then tying them to price activity in the market have improved. Moreover, metrics such as the number of tweets or posts, retweets and followers can be leveraged to identify who has the most impact when they talk about a company.
Incorporating social media monitoring into a market surveillance program is a steep learning curve. At Nasdaq, we have taken the lead in experimenting in this new space with the goal of developing an approach that will help define best practices across the industry.
Learn more about our social media monitoring here.