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How Twitter Can Incite Financial Panic
economywatch.com Social media has become an ever-present element of modern life. Financial markets can be affected too: A fake tweet last year (about an attack at the White House) caused nearly $200 billion to be wiped off the NASDAQ before eventually recovering. How did a simple tweet, which can be made up by anyone, become so powerful? On the morning of 22 January 2013 a story started to develop on Twitter about the imminent and unexpected resignation of Jens Weidmann, the CEO of Deutsche Bundesbank. The first documented tweet came at 10.02am and was traced back to an anonymous blog profile called “Russian Market”, which currently has just over 23,000 followers. In 25 minutes the information had been exposed 256,634 times and by 10.20am the euro had fallen from 1,3340 to 1,3267 against the US dollar, dropping 0.55% in value. Decimal movements like these may seem insignificant but given the heavy gearing of the international currency markets, vast amounts of money can be made on micro movements if you can control the fluctuations and have this information prior to all other investors. The rumour was not only tweeted and re-tweeted by wild market desperados and self-appointed experts but also by more established parties in the business. Stock traders at banks and finance editors at established newspapers ran with it too. When a spokesman from the Deutsche Bundesbank issued an official denial of the rumour, which hit Twitter at 10:20am via the Dow Jones/Wall Street Journal, it was with the rather strong wording “komplette blödsinn”, meaning “utter garbage”. In just seven minutes, the official denial of Weidmann’s resignation had been shared 344,863 times on Twitter and in the meantime the euro had pretty much re-stabilised to the same value it had before the rumour mill went into overdrive. The Weidmann case is not isolated. Social media platforms have more than once been used as vehicles for spreading junk evidence that has excited the markets in unfortunate ways. On 23 April 2013 a “hoax tweet” was sent from the Associated Press, which appeared to have had its account hacked. The tweet read: “Breaking: Two Explosions in the White House and Barack Obama is Injured" and caused widespread panic in the financial sector. The US stock market crashed within minutes and the CBOE Volatility Index, also known as “the fear index” because it predicts potential volatility in the market surged 10%. During this storm, the S&P 500, the NASDAQ and crude oil all dropped 1% and the broader market apparently lost almost US$200 billion.
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