Blogonomics: Market Manipulation

For the past week, anybody going to this page at Seeking Alpha has found a blog entry that isn’t there. There are 42 comments, untouched. But the actual blog entry, we’re told, "has been removed, pending investigation of claims of material inaccuracies". Joseph Tartakoff has the story: the blog entry was written by one Liam Mulcahy, a purported hedge fund manager who was short the stock of Microvision. After it appeared, Microvision stock fell by as much as 20%, and closed down 10%. It was all very scandalous, with accusations of market manipulation being thrown around willy-nilly.

Here’s Michelle Leder:

It’s deeply disturbing that virtually anyone — or perhaps the word is no one since it’s not clear that Mulcahy actually exists — can go on to a major site like Seeking Alpha and post whatever they want about a publicly traded company with little or no consequence and make money in the process…

For all of us who write about publicly traded companies online — and there’s a lot more now compared to when I started nearly 5 years ago — this will hopefully serve as a wake-up call. Let’s hope that the SEC is also paying attention to the Microvision/SeekingAlpha mess. While the Internet gives people access to information that was never readily available before, it also makes it a lot easier for someone with questionable goals to game the system.

The reason I’ve held off writing about this until now was that I was waiting to see whether Seeking Alpha would reinstate the post. They certainly wanted to, as Seeking Alpha founder David Jackson wrote to me on Friday:

We’re aware that Seeking Alpha moves stocks. Despite the criticism of the lack of information about the author, we were happy with the transparency: there was a clear disclosure that the author’s fund is short the stock, there were no misleading claims about the author, and readers were free to provide an alternative viewpoint in comments below the article (which they did).

Seeking Alpha is widely read (over 3MM unique visitors a month) because we’re prepared to publish articles that are opinionated, by people with "skin in the game". We work to ensure that articles do not contain factual inaccuracies, that authors disclose positions clearly, and that authors aren’t using us to create movement in stocks to trade off. But we’re not in the business of censoring authors’ opinions.

We love that we publish articles on the short side; they help investors to avoid potholes, generate real discussion of companies and their businesses, and are a fresh change from the bland rehashes of press releases that are too frequent in financial media. In this case, the article made points that are of great importance to anyone who owns or is considering owning Microvision’s stock. We temporarily pulled the article because we received two disputes (via our article dispute process) that the article contained material factual inaccuracies. In looking into them, neither was sufficiently convincing. However, Microvision’s management has told us that the article contains factual inaccuracies, so we’ve given the company until the end of today to provide this information to us before we republish the article.

It’s also worth putting Mulcahy’s alleged market manipulation in perspective. Here’s a year-to-date chart of the stock, with an arrow pointing out the Mulcahy-induced move, in case you would otherwise have missed it:

What’s more, there was enormous volume of over 6 million shares on Friday (three times the Mulcahy-induced volume) when Microvision got included in the Russell 2000 index. Yet even with huge numbers of index funds all having to buy the small-cap stock at the same time, the stock still contrived to close down quite substantially on the day; it fell yesterday, too. In fact, the stock has been going steadily downwards for a couple of weeks now, and Mulcahy’s post is looking more prescient than manipulative. If MVIS can’t get a bounce even on getting included in an important index and even after traders scramble to cover shorts put on too hastily as a result of a blog entry, how can it rise?

Microvision is a small-cap stock trading in the low single digits: by their nature, such stocks are likely to move around quite a lot. Yes, there was a swing of 18% from intraday high to intraday low on the Monday after the blog entry was published – but that was mainly a function of the fact that the stock was trading at a mere $3.30 to begin with: the actual drop in share price was only 60 cents per share, which is very common on the Nasdaq. Besides, back on January 16, the intraday swing was 84 cents, or 26%: such moves are hardly unprecedented, and they have to be expected by anybody holding such a volatile stock.

Michelle Leder told me that she’s upset about Seeking Alpha publishing the blog entry because it can "hurt small investors"; I, on the other hand, would think that such investors would welcome Mulcahy’s post. The only good reason for them to be invested in Microvision is that they believe in the company’s fundamentals, and think it’s undervalued on the stock market. If Mulcahy’s post is factually incorrect, then all it does is put the stock on sale, and create a fabulous buying opportunity. On the other hand, if Mulcahy has a point, then they learn about the company and can adjust their analysis of it accordingly.

My feeling is that it’s very hard for a blog entry from an unknown writer to move the market unless it touches some kind of a nerve and has at least an element of truth to it. Companies whose stocks fall, and their apologists, love to blame market manipulators for their falling market cap; sometimes, such accusations even make it into Vanity Fair. But 90% of the time, there’s no manipulation going on, just markets working as they should, with people buying stocks they think are cheap and selling stocks they think are overvalued. Seeking Alpha is a great way to bring those people together and have them debate each other in blog format; it’s silly to try to shoot the messenger.