According to the efficient market hypothesis (EMH), share prices reflect all relevant information at any given point in time, and stocks always trade at exactly their fair value. EMH is built on the basic premise that the information is baked in the price and market participants are rational.
But is it true? The recent Zoom confusion could come handy for one to debunk the EMH theory.
The Zoom Confusion
You might often think- What’s in a name? (especially if you are a Shakespeare fan!). Well, the share market has just proved that there is quite a lot in a name, or a Ticker, to put it more accurately!
The event came into light towards the end of February 2020- shares of Zoom Technologies Inc had more than doubled in just 1 week. The Company, a Beijing-based maker of mobile phone components had a market capitalisation of mere $18 million.
Why the sudden leap?
The answer is- ticker confusion. Zoom Technologies Inc trades on the NASDAQ as ZOOM. Does the ticker ring a bell? Given the current lockdown situation with offices adhering to social distancing norms and people working from home, the word Zoom is easily associated to video/ calls.
Introducing the COVID 19 situation savior for many- California-based Zoom Video Communications, a Company renowned for its online video-conferencing platform. Be it office team meetings, online classes for schools and universities or family gatherings that have been missed due to the pandemic restrictive measures, Zoom Video Communications has allowed people to avail its need of the hour services.
With video conferencing expected to benefit from the coronavirus, market and investors were likely to build positive sentiment around its stock, which trades on the NASDAQ as ZM.
But sadly, this did not happen, as the wrong Zoom surged by over 50% right when the confusion began. Ironically, The right Zoom was up by merely 11%.
Breaking Down the Zoom Confusion
Investors seemed to be confused for the issue for a prolonged period of time.
In the sell off period driven by the COVID 19 market mayhem, the S&P 500 fell by over 20% in March 2020. However, Zoom Video’s stock had surged 50% in the same period.
Looking at the other part of this confusion- Zoom Technologies, deemed to be a small cap stock that traded over the counter, was up, rather and the stock saw a sevenfold increase in its price, from around USD 3 a share to over USD 20 in just one month, so much for market efficiency.
Subsequently, the Securities and Exchange Commission (SEC), the securities markets and investors’ watchdog, has been vigilantly eying COVID-19 fraud. SEC’s civil enforcement authority has the aim to suspend trading in securities of companies that have been making suspicious or questionable disclosures about vaccines, protective devices, testing, mitigation and technology. According to Forbes, 17 such suspensions have been in place (as per a report dated 21 April 2020).
The authority’s concern over the recent Zoom confusion is considered to be the highest profile trading suspension to date.
A 10-day suspension which was effective from 25 March 2020 was made for the following reasons-
- Concern over the confusion of OTC stock Zoom Technologies, Inc. (ZOOM)
- Concerns about the adequacy and accuracy of publicly available information concerning Zoom Technologies, Inc. including its financial condition and its operations since 2015
- Concerns about investors confusing over both companies for a long period of time
Does the Zoom Confusion Prove Efficient Market Hypothesis Wrong?
The interesting turn of events seems to bring into the picture the long-debated bias of the Efficient Market Hypothesis, which argues that it is impossible to do well in the stock market because all information is already reflected in market prices.
Simplifying it- it states that all market prices reflect available information, and this leaves absolutely no room for the opportunity to make above-average returns.
Taking cues from the Zoom confusion- the issue occurred when the market participants have not been perfectly efficient (also, it is not ideal ever with the dynamic nature of businesses). Secondly, public information about Zoom Technologies, Inc. was not available to investors. Therefore, cross checking fundamentals before investing in the stock would not have been possible. But this did not stop the speculators from going all guns blazing. Thirdly, the share market is largely driven by human behavior at this at times can be irrational.
It is clear that Zoom Technologies (ZOOM) has nothing to do with Zoom Video Communications (ZM). Moreover, ZM was supposed to be the eye candy stock this COVID 19 period for making lives easier through its video conferencing services. On the other side, is ZOOM- its operations do not seem to be very clear to date.
Investors who were excited about ZM got their tickers mixed up and accidentally ended up purchasing ZOOM causing the wrong company to be the new market darling, as ZOOM did zoom!
Would you call it the event of an “efficient market”?