Dazed and Confused
July 11, 2001
The stock market can be very confusing, even to the most adept investors. For instance, people often mistake the ticker symbol of one company for another company's symbol. What are the effects of this ticker symbol confusion?
Using the case of MCI Communications, whose symbol "MCIC" is similar to an unrelated company whose symbol is "MCI," one researcher found the effects are significant:
- The daily volumes of the two stocks were significantly correlated at around 55 to 60 percent during 1997, when MCI Communications was negotiating a merger with WorldCom.
- During times of large stock movement by MCI Communications, the other company, "MCI," traded as much as 10 times its average daily trading volume.
- The stock movement of MCIC replaced the bond index as the closest predictor of returns for MCI, which is a bond investment fund.
Other events also suggest ticker symbol confusion:
- In 1997, when the Financial Times reported that the Czech Value Fund (mistakenly abbreviated to "CVF") had invested in fraudulent companies, it resulted in a 32 percent drop in the share price of Castle Convertible Fund.
- News that AT&T had acquired Tele-Communications Inc. (ticker TCOMA) on June 24, 1998, led to a 15 percent surge in the stock price of Transcontinental Realty Investors Inc.
- On December 3, 1998, the share price of Temco Service Industries doubled when investors confused it with Ticketmaster Online, an Internet stock that went public that day.
- The share price of Appian Technology rose by 650 percent when AppNet Systems went public.
As many as 1 percent of all orders are mistakes, an error rate that is too high to be explained by fat fingers. The researcher concludes that the confusion is mainly attributable to uninformed traders who tend to be small market players.
Source: "A Case of Mistaken Identity," Economic Intuition, Winter 2001; based on Michael Rashes, "Massively Confused Investors Making Conspicuously Ignorant Choices (MCI-MCIC)," Journal of Finance, Forthcoming.
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