Associate Professor of Law, Columbia University
A Legal Perspective on Technology and the Capital Markets: Social Media, Short Activism and the Algorithmic Revolution
In this essay, I examine the technological revolution in the capital markets through the normative lenses of law, policy and regulation. Do new media platforms necessarily enhance market efficiency? Or do they facilitate fraud and manipulation of stock prices? I focus on the rise of short activism on Twitter, Seeking Alpha and similar forms of social media: much like a stock promoter induces others to buy so he or she can sell at a profit, so a short activist might dupe others into selling so he or she can lock in profits before the stock rises again. Second, I examine the ways in which the rise of algorithmic trading shapes the emergence of accurate prices in the capital markets, from cybersecurity risk to limit order cancellations. There is growing evidence that prosecutors are taking technologically induced price distortions quite seriously. Finally, I consider emerging frontiers of technological innovation in the capital markets. The jury is still out on whether the benefits of digital ledger technology exceed the costs of the rampant investor deception which has led to a steady stream of crypto prosecutions and enforcement actions.
It is with excitement and yet some trepidation that I examine the legal implications of the technological revolution transforming our capital markets. Not long from now, developments which appear to be revolutionary today will have been rendered obsolete by the breathtaking pace of change that has come to characterize this field. The only question is when—not if—this essay will be confined to the dust bin of historical irrelevancy. And yet, if the past has taught us one lesson, it is that the fundamental policy challenges facing the capital markets have not changed very much. Utopian visions notwithstanding, the centuries-old challenge of raising capital in an environment of asymmetric information remains a powerful constraint on financing valuable projects. In this essay, I examine the technological revolution in the capital markets through the normative lenses of law, policy and regulation. The key question is: to what extent does ongoing innovation further the twin policy goals of financing valuable projects at accurate prices, which encourages efficient investment in the real economy; and rendering secondary markets sufficiently liquid to facilitate welfare-enhancing trade? I begin by considering the rise of new mechanisms of digital information transmission. A large and growing literature examines the role of platforms like Seeking Alpha, Twitter and other social media in conveying news to the capital markets. Like newspapers of old, these forms of new media facilitate rapid transmission of material, market-moving information to the investing public.
But does instant communication necessarily enhance market efficiency? Or do these platforms have a dark side, facilitating fraud and manipulation of stock prices? A key question is the extent to which social media has empowered so-called “negative activists”—hedge funds and other traders who take a short position in a firm’s stock and release negative information about the company—to induce a panicked run on the firm. So long as the activist is a “short and hold,” riding out Twitter-induced volatility with other shareholders, social media attacks may indeed promote price accuracy and market efficiency.