The Government Chases Rumor Mongers, Mirages, And Ghosts

Several agencies within the federal government will start to target people and firms who spread rumors to move share prices up and down. Allegedly, this is a practices often used by short sellers to push stock prices lower.

According to The Wall Street Journal, "The Securities and Exchange Commission, under fire for not responding more vigorously to a raft of rumors that have pounded stock prices, says it is cracking down on firms or individuals that illegally spread false rumors"

What is a false rumor? It may be hard to draw a bright line. Lehman Bros (LEH) has been hurt by reports that it has been losing customers and that its write-offs are growing. The same questions are being asked about several other Wall St. firms. Of course, the reports could be true. To a large extent, the answer as to who is right may take several quarters to sort out.

A "false" rumor is obviously a tale made up to move a share price. But, as that rumor is heard by a second or third party, how do they know whether it is true or it is not? Traders make decisions as much on instinct about the quality of information as anything else. Verifying each piece of information could take days. By that time, the market has come and gone.

Rumors are as old at trading itself. Trying to prevent them is like chasing a ghost.

Douglas A. McIntyre