If a Tweet Can Move a Market, the Fault Is the Market's

When Elon Musk was pursued by regulators and shareholders over things he said about Tesla and Twitter, the argument was always framed the same way: a powerful man said something careless, prices moved, people lost money, therefore the man is at fault. I want to argue the opposite. The man may be careless. The failure is the market's.

People Should Be Allowed to Talk

Start from a principle I think is not controversial once stated. People should be able to talk about the market openly, and they should be able to be wrong. A chief executive saying he is thinking of taking a company private, a fund manager saying a stock is overvalued, a blogger saying a product is a fraud: these are opinions about the economy, and a society in which they cannot be said aloud has lost something important.

Now add the observation that when such things are said, prices sometimes swing by a fifth in an afternoon.

The usual response is to blame the speaker and to build rules about who may say what and when. I think the response should be to ask what kind of market swings by a fifth because somebody talked.

Companies Do Not Lose a Fifth of Their Value in Two Days

A company is a set of factories, contracts, employees, patents and customers. On Monday it has them. On Wednesday it still has them. Whatever we decide "real value" means, and the phrase is slippery, it is a property of that set, and the set did not change because a man posted a sentence.

So when the price moves a fifth, the price was not tracking the set. It was tracking what traders think other traders think. That is not valuation. It is a crowd watching itself, and a crowd watching itself can run in any direction at any speed.

This is the general failure I keep returning to: the market is untethered from the thing it is supposed to measure, and the untethering comes from the human psyche rather than from anything about the companies. A steady market would be one in which a careless sentence produced a shrug, because everyone holding the stock knew what the company was and the sentence did not change it.

Why It Is So Fragile

Three causes, and they reinforce one another.

Most trading is for the short term. A large share of the volume on any exchange is people, firms and algorithms trying to profit from the next move rather than from the company's next decade. I have written about the fastest end of that spectrum; the point here is broader. A trader who plans to be out by Friday does not want a steady market and does not care about the factories. He wants movement, because movement is where his profit lives. A market dominated by such participants will amplify every sentence, because amplification is what they are for.

Herd mentality. The relevant question for a short-term trader is not "what is this company worth" but "what will others think it is worth tomorrow", which becomes "what do I think you think about what I think you know". Keynes described this as the beauty contest in which you pick not the prettiest face but the one you expect others to pick. Under that logic a tweet is not information about a company. It is information about what everyone else just read, and the rational move is to run with the herd before it runs over you.

Nobody does the homework. Because horizons are short and the game is about other people's reactions, due diligence stops paying. Why spend a month understanding a company's competitors if you will not hold the stock for a month? So the people setting the price increasingly do not know what the company does. And a price set by people who do not know what they are pricing will move on anything, because they have no anchor to hold it.

Put the Blame Where It Belongs

Now return to Musk. Given a market like that, of course a sentence from him moves the price. It would be strange if it did not. The fragility was there before he opened his mouth; he merely demonstrated it, as anyone with enough followers could.

Prosecuting the demonstrator is satisfying and changes nothing. Next year someone else will say something, the crowd will stampede again, and we will look for the next careless man.

The honest conclusion is that a market this sensitive to talk is not doing its job, and the remedy has to be structural: raise the cost of speed, lengthen the horizons, make homework pay again. Those are hard reforms with real costs, and I do not pretend they are simple. But they aim at the mechanism. Rules about who may tweet aim at the symptom, and they have the additional defect of teaching everyone that the market is fine and the problem is people talking.

It is not fine. A measuring instrument that gives a different reading depending on what was said near it is broken, and you do not fix a broken instrument by asking people to whisper.