Stock Ticker Confusion: What are Words?
Tags: Nasdaq, Zoom, Stock Market, IPO

If you’d invested $100 into Zoom Technologies Inc. (ZOOM) stock on March 21, 2019, you’d now, roughly one month later, be around $45,000 richer. Which sounds too good to be true, is, while very true, a great example of one of my favorite stock market phenomena.

Chances are that you have heard about the recent IPO of Zoom, the California-based video conferencing platform, which went public on April 18 and currently has a market cap of roughly $16 billion. The thing is: Zoom Video Communications Inc., the video conferencing platform, does not trade under the ticker ZOOM but under ZM. Zoom Technologies Inc. (ZOOM) and Zoom Video Communications Inc. (ZM) are not one and the same company. Zoom Technologies Inc. is a Beijing-based producer of smartphone spare parts and traded at $0.005 over the counter last month and did not post revenues since 2011. The other Zoom just listed last week and thus didn’t trade at all last month.

Obviously, people were misled by the similar names of the two companies (and the misleading stock symbols). However, while you should never underestimate what people are capable of (including attempting to buy public shares of private companies), this is most likely due to news-scanning trading algorithms and possibly a handful of smart human investors betting on exactly this inefficiency. The hilarious thing about this is — if you had actually bought a bunch of ZOOM shares last month, believing it to be ZM, you would have made a great return, given you closed your position on time.

Nevertheless, this is by far not the first time this is happening. The phenomenon of the co-movement of stocks with similar tickers was already analyzed by Michael S. Rashes’ in his 2002 publication in the Journal of Finance with the great title: “Massively Confused Investors Making Conspicuously Ignorant Choices”. Here, Rashes looked at the price movements of MCI Communications (MCIC), once one of the largest telecommunications firms, and MassMutual Corporate Investors (MCI), a closed-end mutual fund. Rashes:

“In spite of the fact that MCI and MCIC have little to do with each other, there has been an unusual amount of comovement between their stock prices, particularly within the period during which MCIC was engaged in merger negotiations. In addition to return correlation, the stocks have experienced an extreme degree of correlation with respect to their volume patterns and volatility levels”.

A similar thing happened in 2013 when Twitter went public and people mistook its stock with that of Tweeter, a Boston-based electronics company that had filed for bankruptcy and was liquidated five years prior. Another time this occurred was when Snap Inc., the parent of social media platform Snapchat, filed its prospectus for its upcoming IPO in 2017, thus its shares were not trading at the time. This, however, did not stop investors from sending up the stock of Snap Interactive, a totally unrelated company up by 122%. However, investor confusion does not always send stock prices up. In 1997, Castle Convertible Fund, another closed-end mutual fund, that trades under the ticker CVF had to learn this the hard way. To the fund management’s surprise, CVF’s stock suddenly went down by 32 percent without any proper reason. Apparently, a few confused investors had caused a selloff, as they mistook the company for the Czech Value Fund, which was abbreviated as CVF in a Financial Times article published that day and faced tremendous losses.

A question that remains is what to do in this situation as a regulator or as a company. This is not always clear. When his stock surged, Alex Harrington, CEO of Snap Interactive commented:

“An investor who does even the slightest bit of due diligence should recognize we are a different company. I have no obligation to set the record straight”.

When Tweeters stock shot up, regulators halted the trading of its shares — also because the company was de facto bankrupt, which made this move justifiable. This is an important fact, because what if investors genuinely loved Snap Interactive and the stock move was uncorrelated to Snap Inc’s upcoming IPO. Halting trading in that scenario would’ve been a strong interference with market mechanisms. Nevertheless, usually, it’s pretty clear what’s driving such a stock move, as in the ZM/ZOOM case. And usually, companies would realize that and swiftly issue a press release letting people know that their company might not be the one investors expect it to be.

Now, is this is a serious issue? Not really. First of all, most people and/or algorithms are smart enough to buy the right stock. Also, the actual trading volumes are not as big as that they would have an impact. Yet, it shows that even in very automated environments, a margin of error still exists. All in all, its a minor inefficient irregularity — yet still an interesting one.