A news item which relates to conditions of a wholly unexpected nature has a profound effect on the
market.
On April 7 an Internet posting of what proved to be a bogus Bloomberg financial news story sent shares
of PairGain Technologies Inc. (Nasdaq:PAIR), a small California technology company, soaring 31
percent only to fall back to earth when the story proved false. The abrupt rise and subsequent fall in the
price of the shares highlighted the perils that investors face when following tips from Internet bulletin
boards and chat shops, where postings go largely unregulated and
rumors spread like wildfire.
Shares of the Tustin, Calif.-based PairgGain, a maker of high-speed access products used by phone
companies, started the day in the Nasdaq stock market at $8.50 and traded as high as $11.13 before falling
back and closing at $9.38, an $0.88 gain overall.
Nearly 13.7 million shares changed hands, a heavy day of trading for the company's stock and among the
most actively traded shares on Nasdaq that day.
The massive and wildly gyrating trading began when buyers went to a financial Web page sponsored by
Internet portal Yahoo Inc. (Nasdaq:YHOO). The page included a link to supposed news on PairGain. As
part of its service, Yahoo! maintains message boards featuring all publicly traded companies on the three
major exchanges: New York Stock Exchange, Nasdaq and the American Stock Exchange.
When investors went to the link, they were transferred to a new page, formatted to look like a Bloomberg
news site, featuring a story that was supposedly published by Bloomberg. The quality of that news item,
that is its dependability, the extent to which one may rely upon it, depends on its source. The readers were
taken in by the Bloomberg name.
The fictitious story said PairGain was being acquired by Israeli-based ECI Telecom Ltd (Nasdaq:ECILF).
for about $1.35 billion in cash and other compensation. This false news apparently sent investors
scurrying to buy up PairGain shares. It is our own suspicion that the perpetrator of the fraudulent
announcement may be a crackerjack computer user. Last month a rumor was floated that ECI Telecom
was negotiating an acquisition. When ECI Telecom management denied the story its shares plummeted by
several dollars. This time
someone scored an ill gained profit.
The ways and methods used for investing nowadays, differ for various investors. For some, a shrinking
number we are told, it still means a daily telephone conversation with a stock broker who advises them on
investments. He is a source of updates on prices and meaningful news developments. He will advise when
to sell and even what
to buy.
For the new breed it means simply opening up the PC, warming up a 56bps modem and hitting the
bookmark sign which, with a click of the mouse, takes him directly to the Yahoo financial portal and an
open window to all of the announced financial
news.
The reports and interviews with the new breed of investors who buy and sell stock on the Internet, have
not gone unnoticed. A growing plethora of companies, including Schwab, Datek, E*Trade and shortly
Merrill Lynch, is being added to providers of Internet brokerage services. They even offer a possibility
for clients to obtain pieces of the so called "hot issues" -- the Initial Public Offering Internet shares
which often soar by hundreds of per cent from their issue (offering) price.
Reports abound with stories of profits of tens of thousands of dollars in a single day of trading profits.
Rarely reported are losses such as were absorbed by PairGain investors, some of whom
were fleeced.
As many as 200 million people around the world may be using the Internet within a year or so, according
to a report from the United Nations Economic and Social Commission.
The growth in number of Internet users is mind boggling and in the global village unregulated
environment of the Internet it is caveat emptor-- "Let the buyer beware". Most of the users of the Internet
are legitimate but, as in the real world, perpetrators of fraud on the Internet are difficult and sometimes
impossible to find, identify and
punish.
Yet it is more than likely than in the not too distant future the majority of the share trading will be global
and executed electronically, as investors learn to deal with the newly found power to invest on any market
at any time in real time.
Both investors and speculators, rely on news about developments in companies in which they have an
interest. Whether correctly or not, news items may have a dramatic effect on near term price movements
of a given security. Typically, respected, highly-paid securities analysts issue projections for quarterly
earnings results. Subsequently, when a company announces earnings within the range of anticipated
projected earnings it is likely that there will be little movement in the price of the company's shares.
Should the actual earnings deviate substantially above or below expectations, it is likely to lead to an
immediate reaction: attracting a wave of buyers or sellers. When Yahoo! recently reported earnings of
three cents above expectations, the Yahoo! shares, which had climbed sharply before the announcement,
continued to move even higher. Much of the price rise had been discounted in advance because of
optimistic expectations.