A financial crisis in the age of misinformation: More market volatility and greater liquidity risks

The role of social media, where vast amounts of information circulate but where it’s increasingly difficult to separate fact from fiction, has become crucial in financial markets. Politicians, analysts, and investors turn to these platforms to communicate or seek information. The most extreme example is Donald Trump: he doesn’t need to hold news conferences; he posts directly on his own platform, Truth Social, and the impact of his words resonates instantly in the stock markets. His statements send shockwaves through markets in Asia, Europe and the United States, depending on the timing of his message. Trade relations change overnight on the strength of posts that are often contradictory and exaggerated, and markets react in panic, with short-term overreactions to rumors or misinformation becoming the norm.

In a report published last November, the Bank for International Settlements (BIS) warned of increasing market fragility. “Extreme intraday price movements underscore how sensitive markets have become to even small surprises,” the report stated, despite data showing that liquidity levels in these markets are the highest in 25 years.

Paradoxically, the abundance of money — which facilitates easy buy and sell transactions — carries the risk of it quickly disappearing from the market in search of safer assets, potentially triggering episodes of illiquidity, particularly in equities and debt. Such situations “can be especially problematic if market participants have become accustomed to consistently high levels of liquidity, thereby amplifying the shock of its sudden absence,” the BIS report noted.

The rise of automated trading and the growing dominance of High Frequency Trading (HFT), which accounts for 50% of all trades on the U.S. stock market, are some of the contributing factors.

Monday’s trading session perfectly illustrates how misinformation influences the markets. In just minutes, the S&P 500 swung from a 4.7% decline to a 3% rise, before ultimately closing down 3.5%. It was a day of record trading volume on the U.S. stock markets, with around 29 billion shares traded, the highest in at least 18 years, according to FactSet data. The catalyst? A message on X claiming that U.S. President Donald Trump was considering a 90-day tariff pause for all countries except China.

The timeline of the craziest 15 minutes in recent market history begins with the following sentence: “HASSETT: TRUMP IS CONSIDERING A 90-DAY PAUSE IN TARIFFS FOR ALL COUNTRIES EXCEPT CHINA.”

Within minutes, the message was retweeted by hundreds of accounts, while trading desks — and even some newsrooms — rushed to verify the information. Optimists were swept up by the possibility of Trump’s (partial) capitulation and immediately started buying.

The message was further amplified by Walter Bloomberg, an X user who, under the handle @deitaone, relays Bloomberg’s alerts to his 850,000 followers in capital letters. This was quickly retweeted by hundreds more, triggering a rally in the market. High-frequency trading algorithms added fuel to the fire, boosting the S&P 500 by $2.4 billion in mere minutes.

However, this brief surge was short-lived, as the White House itself denied the claim. Media outlets that had initially reported the news, like CNBC and Reuters, issued corrections and apologies for the mistake. Meanwhile, Walter Bloomberg deleted his original post and shared a follow-up with the acronym “WTF,” along with a screenshot of CNBC’s retraction.

In an increasingly globalized world — despite Trump’s divisive trade war — immediacy is becoming more and more important, and irrationality often grips some investors. In contrast, standing on the side of reason are the managers, who, with their calls for calm, urge investors not to make sudden portfolio changes and to remain composed.

“X is where everything happens in real time. Raw ideas and no filters, with more truth and more voices. 2025 is already wild buckle up,” predicted Linda Yaccarino, CEO of X, in mid-February.

Trump’s messages from the past week, coupled with the critical voices from the financial industry warning of the impacts of tariffs on the global economy, make it clear that the negotiations are following very different paths from those traditionally used in diplomacy.

But beyond the deluge of information flooding through the internet and social media, there have also been instances of people cunningly exploiting fake news. In 2013, a tweet from the Associated Press claimed that there had been two explosions at the White House and that then-president Barack Obama had been injured. The S&P 500 lost $136.5 billion in mere minutes, precisely the time it took for the agency to acknowledge that its account had been hacked.

Two years later, a fake takeover bid for the home cosmetics brand Avon caused its shares to soar by 20% before the company clarified that it had no record of the deal, which had been filed with the SEC by PTG Capital, a company with no prior registration.

And back in January 2024, the SEC’s X account was hacked to falsely announce that the market watchdog had approved the first bitcoin exchange-traded fund (ETF), causing the cryptocurrency to skyrocket. In cases like these, the market’s quick reactions clash with statistics that indicate that, despite the growing role of social media as a source of information, people trust these platforms the least. A study published by the OECD last June revealed that 57% of respondents do not trust social networks very much, or at all.

In the bond market, investor overreaction is compounded by a trend within the market itself, one that has been worsening since 2016, according to experts at Barclays. “We expect increased fragility in the fixed income market over time, with more frequent bouts of illiquidity, poor functioning, and heightened volatility,” the British bank’s analysts wrote in a paper a year ago, warning that “policymakers will need to intervene to support market stability more frequently.” As ten-year bond yields continue to climb, triggering alarm bells, calls for intervention by the U.S. Federal Reserve are becoming increasingly urgent.

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