Page last updated at 11:41 GMT, Friday, 19 September 2008 12:41 UK

The origins of financial rumour

By Jorn Madslien
Business reporter, BBC News

Champagne toast
The trade in secrets is lucrative

Traders and brokers, analysts and financial journalists, talk a lot - often with each other, even when they are not supposed to.

They discuss facts and methods and regulation and politics. And they gossip.

There is nothing wrong with expressing concerns about a bank, a company's cash-flow problems or the abilities of a high-profile chief executive.

But it is illegal to borrow stock to short sell it and then try to depress its share price by spreading false rumours.

Investors who do this could be banged up in jail or fined, and yet there are many who still take the risk.

Indeed, the rumour mill tends to spin at its most active alongside large short-selling positions.

Max exposure

A ban on short-selling may be relatively easy to police. But it is much harder to govern word of mouth.

Given that he is breaking the law, any rumour-monger who is spreading vicious tales about a company, or indeed a country, will obviously be keen to hide his tracks.

Wall Street traders
For traders, information is key

But at the same time, he wants to maximise the impact of his story. And what better place for such activities than the cocktail party?

The story of a pre-Christmas party in New York during the early 1990s illustrates how the rumour mill can work.

It was a cold winter's evening at a stylish Manhattan basement bash hosted by one of the major investment banks. Who the host was hardly matters. All the banks arrange similar events throughout the year.

The room was filled with a crowd of mainly young men, though there were also young women there. Almost everyone wore dark suits and discreet ties.

Tray-carrying waitresses wore dark pencil skirts and white blouses as they handed out tall glasses of champagne and small nibbles to young professionals who were busy swapping business cards.

Trading information

As is always the case in the world of finance - in a somewhat bizarre paradox, given that it is all about money - everything was free, so no cash was changing hands.

Men in suits
Volatility results in profits for some, losses for others

Instead, the currency of the evening was information.

Everyone was hungry for a story. The journalists were fishing for stuff they could print. The traders and brokers wanted to know who was in difficulty, and who was going for gold.

In such a pool (or perhaps cesspit is a better word?) of information, nobody is giving anything away for free. You've got to give to get.

And, for once, the journalists were the ones with the most currency.

Financial journalists spend their days speaking with regulators and investors, with brokers and traders. And much of what they learn is impossible to verify, so no journalist will ever print all that he knows.

But he might tell his sources.

This is why many traders and brokers are prepared to tell secrets to journalists, often in breach of their own bank or brokerage's policy.

They do so because what the journalists give them in return is much more valuable than the information they are revealing.

In essence, they are trading information, and this was the theme of the evening in New York.

A story is born

One story in particular that soon started to do the rounds was startling. A war was brewing in a lesser Latin American country and its currency was heading south.

New York Stock Exchange traders
Everyone wants to be the smartest guy in the room

Moreover, the story went, a hedge fund run by billionaire investors George Soros was getting in on the act by doing his bit to push the currency over the edge using currency derivatives.

And as the champagne continued to flow the tale gathered momentum.

Our team of journalists from my employer at the time - a newsletter whose specialty it was to reveal secrets from the world of financial derivatives - heard it from a number of mouths.

We, in turn, passed it on to our sources, who no doubt told hacks from rival publications. And so a market-moving story was born.

Deliberate lie?

On Wall Street, everyone wants to be the smartest guy in the room, and this is as true in the financial newsroom as it is on the trading floor.

Yet in the sober light of day, the story that had seemed like such a scoop the night before, one that had seemingly been confirmed by a string of market officials as the evening went by, suddenly seemed less believable.

With the luxury of a weekly deadline our team did some further digging, which unveiled the truth: every single aspect of the story was bogus, and so it was promptly, as we say in the trade, spiked.

Nevertheless, we observed considerable volatility in the Latin American country's currency during the hours and days after the party - which means some people lost a lot of money while others made a lot, and a bunch of people a few thousand miles down south were left wondering what was going on.

Now, the story may have come from a hedge fund manager who was trying to move the market in his favour, but equally it might have been made up by someone feeling a bit low on "information currency".

Or perhaps, and this is not as far-fetched as it might seem, it was just a practical joke - albeit one with serious consequences?

To this day, I have no idea where the story originated, but I do know this: for a regulator to prove that someone has deliberately created a false rumour in order to profit from someone else's misfortune is a mammoth challenge.

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