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

Chapter 11. Three Hundred Years of Stock Market Manipulations

From the Coffeehouse to the World Wide Web

In previous chapters, we saw that many of the changes in securities markets brought about by information technology in general and the Internet in particular are positive, democratizing access to markets and information. We also saw that technology is not always an unadulterated boon, and there is ample opportunity to fool yourself by blind data mining, and to find people trying to fool you using an ever-expanding bag of tricks, cons, and manipulations.

As information technology has expanded the scope of resources available to legitimate investors and traders, the Web has also become the prime new venue for the old game of market manipulation. Institutional traders and other long-term market participants often comment that they see far more inexplicable price moves than they did in the pre-Web era. In many cases, these moves are tied to subtle, and not so subtle, attempts at market manipulation using the newfound power of the Internet to transmit and spread rumors, manipulate beliefs, and post incorrect information at little cost, while maintaining the cloak of anonymity.

Price distortions arising from manipulations may be short-lived, but they are real prices, and can dramatically affect the cost of trading and investment performance. The influence of the rumor machine is overlaid on the influences of more fundamental (and benign) factors that move stock prices. Therefore, ...