Stock Markets Face a New Kind of Fraud. Here Comes the AI Deepfakes.

Stock market fraud is as old as stock markets. They go hand in hand.

In the 1870s, the Robber Barons would fight takeover attempts by just printing more stock and driving the price down until the hostile buyers gave up, a practice known as “watering the stock.”

In the 1920s, groups led by Big Mike Meehan and Joe Kennedy would bid up stocks, attract naive buyers to the rally, then dump their stock on the suckers before the whole thing collapsed. This was known as “pump and dump” or “ramping.”

Even after the creation of the SEC in 1934, the fraud never stopped. Just the list of names – WorldCom, Enron, Madoff, Drexel, and Lehman Brothers – is enough to remind investors that stock fraud, overleverage, negligence, and incompetence are part of the investment landscape and always will be.

Buyer (and Seller) beware. Still, technology moves on and new kinds of fraud are now confronting investors.

New frauds are more dangerous than old ones because they’re unfamiliar and can be harder to spot. As reported here, the newest challenge may also be the most dangerous ever.

It involves the ability of artificial intelligence (AI) robots using generative pre-trained transformer technology (GPT) to create fake news that can manipulate markets or mislead investors. The fake news can take the form of deepfake images, phony stories, or scary headlines that cause investors to react before all the facts are known. But the dangers are even greater.

AI/GPT robots can flood the internet with fake stories designed to mislead other AI/GPT robots trained to look for words and phrases in those fake stories. This is a case of robots misleading other robots to disrupt markets.

Considering that 95% of all stock trading today is fully automated (meaning that actual humans do not make the buy or sell decisions, but robots do based on keywords and limit orders), we’re quickly in a world where robots are trading stocks based on what other robots have recommended after those robots have themselves been misled by still more robots attempting to fool the former.

How long before these scenarios are being conducted not by stock frauds but by hostile governments trying to bring down our markets and destroy our society? Maybe we’re already there or dangerously close.

Sticking to fundamentals and using buy-and-hold strategies won’t save you when a war of robot v. robot is raging on the stock exchange floor. The best approach is to hold at least part of your portfolio in physical gold and cash that can have decent returns and provide a relative safe haven from the robot wars.

It was good the Robber Barons didn’t have AI/GPT. It’s too bad the Chinese do.

Corporate leaders and institutional fiduciaries looking to incorporate state of the art predictive analytics to their risk mitigation and strategic analysis should click the link to learn more about Raven Predictive Analytics®.