Does picking a good ticker beat sound financials?

Exchange-traded companies are often being referred to by using the company’s shortened identifier, or so-called ticker. The name comes from a machine called the ticker tape machine, which had a paper ribbon running through it on which financial information was printed i.e. the most up-to-date prices of stocks. To save space, only the abbreviated names of companies were used, hence the custom to refer to companies by this identifier.

As much as it was a useful custom to be able to refer to a company with a few characters, the usage of tickers also led to unexpected anomalies. In a 2019 study, two finance professors at Rutgers University–Camden looked at these anomalies more closely and came to a very interesting conclusion: their research found that market participants buying the wrong company because of a similar ticker name could have a material impact on the share price. On average 5 percent of the trading volume originated from confusion around tickers. They also estimated that undoing these trades costs c. $ 1.1 million in yearly transaction fees for the most affected pairs and can impact returns by as much as 0.5% per year.

There are a few very interesting examples: the two professors cite the example of Twitter (TWTR), which announced plans for its IPO in 2013. As a consequence of the announcement, the stocks of Tweeter Home Entertainment Group (TWTRQ), a U.S. consumer electronics company rose by 1,800 percent (!) because investors had confused it with the social media giant.

Another, more recent example is the one of Zoom. During the COVID pandemic, the stocks of technology companies, especially ones offering remote working solutions have soared. So did Zoom Video Communications (ZM) that had a very hefty price increase of 132% between January and March of last year. Another company called Zoom Technologies (ZOOM) however, a defunct Chinese company saw its share price rise by 900 percent in the same period as investors mistakenly bought its shares instead of ones of the U.S. communications company. SEC, the U.S. regulator even had to temporarily suspend the trading of Zoom Technologies due to the concerns of investors confusing the two companies.

Additionally, the above scenario can be exacerbated by automated trading. Computer programmes use financial news from portals and social media to identify the information that will have a market impact. These applications usually have the authorisation to trade automatically based on the information they find. In case there is wrong information on the site or they interpret it incorrectly, they can pick up the wrong ticker to trade and magnify the anomaly.

Even though professional investors can make such mistakes, we can confidently assume that controls around raising a trade are a lot more robust with institutional than with retail market participants. With the rise of Robinhood and similar trading apps that make stock trading easily available and almost game-like, the proportion of retail investors is bound to increase in the future. As such, we can expect these anomalies to become more rather than less frequent in the future.

Disclaimer: This article was issued by Tamas Jozsa, Research Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view, and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.