When tweets from the POTUS are moving markets, that’s not going to be missed by savvy financiers. In fact, analysts at JPMorgan, Bank of America and CitiGroup have all found correlations between market volatility and presidential tweets. Now they are banking on them, as with JPMorgan’s new Volfefe Index. In this article, we explore how this is problematic, and how blockchain-based prediction markets fit into the picture.
Information in this decade has evolved into its newfound status as the biggest economic weapon since petroleum. As you would expect, the fight for control over data is raging on. But the battle lines are not on the ground, so to speak. They’re in the cloud.
And what’s being put into the cloud at a record pace is misinformation. You can call it fake news, propaganda or FUD. But it all comes down to using fake and/or misleading information for profit and control.
False information is flooding prediction markets
Perhaps the most poignant example of this appeared this year when not one, but three major American banks officially began using the POTUS’ tweets to predict market volatility and movements. This took place despite the fact that multiple sources say that he’s made over 12,000 misleading claims since taking office in 2016. Some would argue that as this behavior continues, it perpetuates itself, becoming more exaggerated and common:
“Research done in our lab, not on the president, suggests that the emotional response that people have to their own lies is reduced every time they lie…” – Matther Rozsa, Salon
Misinformation picks up pace in political seasons
It’s not surprising then that presidential tweeting has continued during a summer full of China trade war news and amidst global economic uncertainty. With US presidential elections looming in 2020, the pace of disinformation is quickening.
Past elections taught us that voters who have been feeding big tech with their personal data on social media platforms are easy pickings when campaigns are searching for on-the-fence voters. Complex, ever-improving algorithms continually give those willing to buy direct advertising access to the likes, spending habits, personal views and living habits of a majority of US citizens.
Now that campaigns have this honeypot of data on its citizens, both sides of the political ticket are using it to their advantage. But there’s only one campaign that we know of that is broadcasting misinformation at a frightening pace:
According to a CNN report in late August, “President Donald Trump made 48 false claims between Tuesday and Sunday last week as he used a barrage of dishonesty to try to sell his trade war against China.”
The misinformation CNN cited included:
- 21 false claims about the US economy
- 12 about trade
- 11 regarding China specifically
- Other false claims on Democrats and immigration
Going back to the administration’s first 100 days, the Washington Post tracked 492 misleading claims that were either tweeted or spoken. This trend that began in 2016 is now gathering momentum.
The phenomenon of broadcasting and pushing out inaccurate information on social media channels has been studied by numerous analysts in its relation to moving markets. In particular, investors and bankers have tracked and noticed tweets that have an effect on interest rates, stocks, and bonds. This is regardless of whether the tweets contain false statements.
Volfefe is born
Out of this unsettling swath of disinformation, bankers, traders, and investors have sought to analyze the POTUS’ tweeting behavior to try and better understand markets and make corresponding moves.
- If interest rate movements followed the tweets.
- What are the characteristics of tweets that did appear to move these markets?
Keep in mind that the bank was well aware of the questionability of the data within the tweets. But what they found was 146 tweets in 2019 that could be characterized as ‘market-moving’. (At least 30 of them, they thought, were likely false positives or just random correlations.)
Why the analysts created Volfefe
Led by Munier Salem, JPMorgan Analysts used machine learning and their proprietary volatility model to demonstrate how presidential tweets raised “investors expectations for future moves in the US rates market.” So, in essence, the Volfefe Index measures the effect on market volatility that Trump’s tweets have.
What they found is that most market-moving statements had to do with trade and monetary policy. The following key words, as shown below, had the most impact according to the Volfefe Index:
Essentially they created the Index to quantify the impact of the tweets to explain measured fractions of predicted market moves. Their studies showed particular correlations with 2- and 5-year US Treasury bond rates.
According to Reuters, the research leading to the creation of JPMorgan’s Volfefe Index pointed to how trade itself and monetary policy has become a big focus for the president. They saw how formal statements, as well as tweets, were being rapidly (and often unexpectedly) disbursed on a globally available social media platform.
“In response, a broad swath of assets from single-name stocks to macro products have found their price dynamics increasingly beholden to a handful of tweets from the commander in chief.”
– JPMorgan Analysts
The significance of Volfefe
Now by significance, we’re not referring to the name, Volfefe. We’ll assume you remember the nonsensical “covfefe” tweet from early on in the administration. By combining ‘volatility’ with that epic tweet, JPMorgan seems to have found the perfect name for their index. Because it essentially tracks the volatility of the president’s tweets.
What is significant is the ‘why’. Because you might be wondering why JPMorgan wrote their report or how the Volfefe Index would help them or their investment clients. According to NYMag, it may have had to do with “swaptions”, which are options to enter into interest rate swaps. In general, swaptions enable investors to manage interest rate risk.
By measuring ‘implied volatility’, which they ascertained by looking at swaption prices, they were able to demonstrate how investors are expecting interest rates to move. This measure of volatility had been increasing in recent months. So, swaptions were getting more expensive since people thought prices would be fluctuating more.
Bank of America and Citigroup
It’s important to note that JPMorgan is by no means the only financial institution monitoring the effects of Trump’s tweets. The Bank of America recently found that the number of his tweets could affect the stock market. According to their report, since the beginning of the administration, on days that saw 35 or more tweets, the stock market dipped a bit. When POTUS had a slow Twitter day with less than 5 tweets, the stock market went up.
In another show of tweet-volatility correlation, Citigroup analysts discovered that many different currency pairs demonstrated higher than expected volatility in the hour following a Trump tweet.
Creating markets for correct information
Now, in more ways than one, investors and traders are reacting and planning around misinformation. Hundreds of tweets, though easily fact-checked as false, are moving markets.
If only there were a way to publicly and permanently verify that information is correct. Oh right, there’s blockchain technology. Let’s take a look at how a blockchain based prediction platform creates a market for correct information.
On the HedgeTrade trade predictions platform, professional traders can publish trade pair prediction “Blueprints” and stake HEDG tokens to back their prediction. Less experienced traders can purchase the Blueprints, unlock the hidden details and make trades on their exchange that mimic the pro traders.
The Blueprints are powered by smart contracts and execute automatically after an oracle has proved the correctness or incorrectness of the trade prediction. If a forecast made by one of the pro traders is incorrect, the purchasers get their money back. Not only that, all these transactions involve cryptocurrency meaning they are quick, global, and cost-effective. Additionally, prediction outcomes are timestamped for all eternity on the Ethereum Blockchain.
Now you have verified, truthful predictive outcomes. The entire system incentivizes and rewards participants to be truthful. Traders that are successful in their predictions move to the top of the reputation algorithm. Those that publish predictions that have false outcomes go to the bottom. Yet everyone on the platform can benefit from the trade data that is truth verified. Sounds good, doesn’t it?
Blockchain technology has a lot to offer in the way of decentralized finance and prediction markets. What HedgeTrade has done is take the concept of truth-telling and organize it into a dynamic platform where traders earn while users learn from them. Meanwhile, all users have the very best available, truthful data on which to base their trades.
As with most blockchain projects, game theory, automated consensus mechanisms, and a token-based incentivization model keep the network running and the users happy.
Welcome to blockchain verified data. This is only the beginning.