False Market

A false market occurs when prices are manipulated and impacted by erroneous information, preventing the efficient negotiation of prices. These types of markets will often be marred by volatile swings because the true value of the market is clouded by the misinformation.

When investors use inaccurate information to guide their decisions, they tend to be irrational and over- or underreact to news. The illogical decisions made by these investors skew the market, causing the true value of a security to be misrepresented.

An example of a false market is the case of a Scottish trader James Alan Craig whose false tweets that two companies were under investigation caused sharp drops in the stock prices of the two companies and triggered a trading halt in one of them in 2015. The Securities and Exchange Commission filed securities fraud charges against him. The SEC’s complaint alleged that Craig’s first set of false tweets caused the share price of Audience Inc. to fall 28% for the day before Nasdaq temporarily halted trading. The next day, Craig’s false tweets about Sarepta Therapeutics Inc. caused its share price to fall 16%. For his fraudulent tweets, Craig created false Twitter accounts that looked like the accounts of two well-known securities research firms. On each occasion, Craig actively bought and sold shares of the target companies but failed to generate a large profit from his trades.

After the fraud was discovered, the SEC issued an Investor Alert titled Social Media and Investing — Stock Rumors that was prepared by the Office of Investor Education and Advocacy. The alert warned investors about fraudsters who may try to manipulate share prices via social media to disseminate false or misleading information about stocks, and also provides tips for recognizing the red flags of investment fraud.