Yesterday, Tesla issued a press release that starts like this:
Announcing the Tesla Model W
PALO ALTO, Calif., April 1, 2015 – Tesla today announced a whole new product line called the Model W. As many in the media predicted, it’s a watch. That’s what the “W” stands for.
This incredible new device from Tesla doesn’t just tell the time, it also tells the date. What’s more, it is infinitely adjustable, able to tell the time no matter where you are on Earth. Japan, Timbuktu, California, anywhere! This will change your life. Reality as you know it will never be the same.
It goes on, but you get the idea by now. Because you are a human. You have context clues to guide you. Maybe you remember how awful the Internet was that day that was all about the Apple Watch. Maybe the phrase “April 1” means something to you. Perhaps you didn’t laugh, exactly, at this press release — I didn’t — but you are able to recognize that it takes the form of a joke.
Computers are notoriously terrible at jokes:
With about five minutes remaining in the trading day, the company posted a statement on its official website under the headline: “Announcing the Tesla Model W.”
In the following minute, the stock jumped about $1.50 or about 0.75 percent from its level the moment before to as high as $188.50.
Nearly 400,000 shares traded in that time, and it was the heaviest one minute of trading volume in the stock since the opening 60 seconds of trading on Feb 12.
Tesla shares quickly retraced most of that upward move and ended the session at $187.59, down 0.63 percent from Tuesday’s close.
So people lost maybe as much as a few hundred thousand dollars because, for a brief stupid minute, they thought that Tesla was introducing … a watch? No, of course they didn’t. They thought Tesla was introducing a thing called the Model W, and they didn’t read any further than the headline, and they bought Tesla stock hoping that the Model W, whatever it was, would be a huge success (or would be perceived as a huge success by someone else a minute later), and then they realized that they’d been fooled, and they sold the stock at a small loss and moved on with their day. And when I say “people” I mean mostly “algorithms,” which are faster and more literal than humans, though in the space of a minute it is conceivable that an actual human saw that headline and fired off a buy order before reading any further.
A reader named Jakob Stoeber sent this story to me and asked what I thought the Securities and Exchange Commission would think of a corporate press release, like this one, that (1) is false and (2) moved the price of the company’s stock. It’s a good question! Of course I won’t give you legal advice, though it does seem like there’s a simple best-practices answer, which is that whatever the SEC thinks, come on, put out your fake press releases at 4:05, not 3:55. There is no reason to tempt fate, or annoy your shareholder-algorithms, like this.
More generally, though, this is a nice data point for a problem that I think about a lot, which is the problem of materiality. It’s securities fraud to “make any untrue statement of a material fact,” etc., “in connection with the purchase or sale of any security,” and companies that make misstatements that are material to their own shares can get in trouble even if they’re not buying or selling. The “materiality requirement is satisfied when there is ‘”a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”‘”
Would this press release significantly change a “reasonable investor’s” view of Tesla? Obviously not. Did it move the price? Apparently! This joke added — very briefly, sure — more than $100 million to Tesla’s market capitalization. Would a reasonable investor care about a price move? Does the unreasonableness — let us say charitably, the speed and literalness — of the market make things that would not otherwise be material, material? My instinct is no: I think that materiality means what it says, and if people or algorithms do dumb things with trivial information that’s their problem. But markets are a lot faster and more literal than they were when the materiality standard was created, and I wonder whether regulators or courts will one day decide that materiality is too reasonable a standard for modern markets. The materiality standard depends on the reasonable investor, and in many important contexts the reasonable investor has been replaced by a computer.
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