Don’t trust everything people say

TRADERS short on oil suffered a brief shock last Thursday. In early trading, a rumour began circulating, originating from a relatively minor Arab news site that the King of Saudi Arabia had died. Despite the implausible nature of the story – it was reported that King Abdullah died during a heated phone debate with Barack Obama – many traders were spooked enough to bid the oil price up by a dollar.

When it later became clear that the King is still alive, the price dropped back again. But the episode serves as an illustration of how sensitive financial markets are to new information – and to rumour. Had King Abdullah actually died, the uncertainty of the Saudi succession would undoubtedly have pushed up the oil price substantially – given that, even the most baseless assertions can have an impact on price.

But then rumour, gossip and wild speculation have always been bugbears for investors. In 1992, George Bush senior was dining with the Prime Minister of Japan, Kiichi Miyazawa, when he fainted and vomited into Miyazawa’s lap. The event provided endless ammunition for satirists, but as CMC Markets analyst Michael Hewson recalls, “dollar-yen collapsed – all the bids disappeared and you couldn’t sell it fast enough.”

When it became apparent that Bush was not actually on the brink of death, the dollar rapidly recovered – but not before a few traders had got burnt.

And while rumours about political leaders cause the most panic, others have their impact too. In 2008, a “citizen journalist” reported that the CEO of Apple, Steve Jobs, had suffered a heart attack and died. The report was widely picked up and Apple’s share price collapsed from $105 to around $95 in less than twenty minutes before recovering equally rapidly.

So what can traders do to avoid getting caught out? According to Hewson, the problem with rumours is that traders have to ask: “When is a rumour not a rumour, but actually inside knowledge?” The rumours that cause the biggest ripples are the most plausible ones – such as takeover bids, or succession crises.

The death of King Abdullah is plausible, for example, because he is known to be ill and because the Saudi Arabian monarchy is famously secretive. Similarly, Steve Jobs has had several serious health problems and is very high profile. Other rumours have much less effect.

Ultimately, traders have to make a judgement call based on the quality of the news source and the plausibility of the news – the important thing is not to instantly panic and make a move based on incomplete information.

But if traders are tempted to try to get an inside edge by propagating their own rumours, another story should deter them. Last year, the Thai stock market plunged 8 per cent after a rumour circulated that the King was dying. Four traders were eventually arrested and imprisoned.