chat rooms study warning

from smh today

A study on investor chat rooms serves as a warning.
Serious market watchers are typically sceptical about online investor chat rooms. What sane person would put any value on anonymous tips, rumours and opinions on the internet? It is even more extreme than buying shares on the advice of a neighbour, who has heard from a cousin about an undiscovered gem.

A new study suggests that heavy-duty spruiking of stocks in internet discussion groups causes prices to rise, at least in the short term.

The question for investors and even occasional traders is whether acting on news or advice from discussion groups is likely to provide enough benefits to compensate for the risks.

In recent years, the number and popularity of internet investor forums has increased sharply.

The rising stockmarket has encouraged small investors to take an interest in share trading and, with the resources sector booming, a whole wave of small exploration companies has listed on the Australian Stock Exchange (ASX).

The majority of these companies are well under the radar of the mainstream broking analysts and media. Internet forums are one of the few places where the junior resources companies get a mention at all and many people use these to gather news and opinions.

Some traders also have been encouraged to follow the online forums because of the occasional financial windfalls for those who act on tips provided by a couple of regular contributors.

For example, traders who took the advice of one of the regular contributors to HotCopper made a fortune when controversial mining company Cudeco had its huge run last year.

And there are others. At any one time, a range of mining stocks is being heavily spruiked on the forums.

A current example is A Cap Resources, a mining explorer with programs in Botswana, China and Australia. Its share price is up more than 400 per cent in the past six months, creating a tidy return for those who acted on the early tips.

Some internet discussion sites operate as part of more general investment and information sites. Financial information company InvestorWeb, for example, has a number of internet investor forums alongside its more conventional research and market commentaries. For the more hardcore traders, HotCopper is the best known site. Others include Share$cene and Aussie Stock Forum. Daily in the various forums, thousands of people post messages about companies. Generally, the posts express optimistic views. Posters, in common with punters, appear more likely to report their successes than their losses.

For small investors who use the chat rooms to gather information, though, it is important to understand the risks.

For a start, although both the Australian Securities and Investments Commission (ASIC) and the ASX say they monitor online forums, in practice it is extremely difficult to stop excessively optimistic reports, false takeover rumours or any other misinformation appearing on them. Without major investigations, it is also impossible to know whether executives of the small companies (or interests associated with them) are contributing misleading information.

ASIC doesn't require discussion forums to be licensed, provided certain conditions are met.

These include that people in the securities market don't use the forums to pass on information or advice, there are warnings included on all the sites that information is not professional advice and that postings are kept separate from other commercial material.

Over the past decade, there have been only a small number of successful prosecutions. In 2005, the Victorian director of a small listed company, Adelong Capital, received a hefty fine and suspended sentence after being convicted of making false statements which were published on a German internet site, but which were picked up locally and caused the share price to rise.

And in 2001, a Queensland man received a suspended sentence after being convicted of making false claims about a Nasdaq-listed company called Rentech in emails and in investor forums.

But the forums are unregulated and there is no guarantee that information is accurate.

The major problem with all the investor discussion groups is that, because posts are anonymous, they are open to abuse by stock promoters. To become a member of a group and post information, all you need is a user name and an email address.

There is nothing to stop a single person having a number of memberships with different names, which means he or she could be posting numerous messages about the same company, creating the impression support for that company is widespread.

A study published last year by researchers at the University of Queensland confirmed that certain information posted on discussion forums, even if it later proved inaccurate, caused share prices to rise.

Conducted by Dr Irene Tutticci and colleagues in the university's Business School, it looked specifically at the impact on share prices of takeover rumours posted to HotCopper.

"We were looking at what happened when information was contributed saying that a company may be, or even should be, a takeover target," Tutticci says.

"What we found was that there was a market reaction to takeover rumours. Trading volumes immediately before and after the posting were higher than normal. In the immediate period after the posting, there was also an impact on prices. The price increases were most noticeable where the company had not previously been identified as a possible takeover target."

According to Tutticci, the share price movements occurred whether or not the information turned out to be accurate. In the 10 months covered by the study, there were 189 takeover rumours posted. About one in 10 of the companies rumoured to be targets were subsequently bought by other companies.

"What the study showed was that if the information was new, traders could make money if they reacted quickly, if they were in and out of the stock," she said.

A more controversial conclusion from the study is that anyone posting inaccurate or misleading information on a discussion site - possibly because they had shares they wanted to offload at a higher price - could benefit.

"It appears that by posting unfounded takeover rumours, it would be possible to make money. We didn't prove it in our research, but the results are not inconsistent with that conclusion."


CHECK LIST

* Online investment forums are not licensed by ASIC.

* Although both ASIC and ASX say they monitor the information, in practice it is difficult. Prosecutions are rare.

* Evidence is growing that some posts to forums are attempts to manipulate the market.

* Posting inaccurate or manufactured information about a company can increase the share price.

* Investors should use the information provided with great care.