Facebook's $5 billion fine shows us that the Efficient Markets Hypothesis is right

It must be difficult trying to struggle through a discussion of a story without having the basic intellectual tools to understand how the story works. Which is the pickle that John Naughton finds himself in here in The Observer. Facebook gets fined $5 billion over data breaches and the share price goes up? Clearly, something is wrong with something, somewhere!

If you want a measure of the problem society will have in controlling the tech giants, then ponder this: as it has become clear that the US Federal Trade Commission is about to impose a fine of $5bn (£4bn) on Facebook for violating a decree governing privacy breaches, the company’s share price went up!

This is a landmark moment. It’s the biggest ever fine imposed by the FTC, the body set up to police American capitalism. And $5bn is a lot of money in anybody’s language. Anybody’s but Facebook’s. It represents just a month of revenues and the stock market knew it. Facebook’s capitalisation went up $6bn with the news. This was a fine that actually increased Mark Zuckerberg’s personal wealth.

The bit that’s gone wrong is Naughton - and to be fair, many others - not grasping that the Efficient Markets Hypothesis is actually correct. At least that semi-strong version, which says that all publicly available information will already be in market prices.

So, what has happened here? We’ve long known that Facebook is going to get fined over the Cambridge Analytica stuff. Facebook even told us that it had $3 billion stashed away in its accounts to pay such a fine. Market participants knew all of this. It was all already in the share price.

So, what happens when the fine is actually announced? That there’s going to be a fine of billions is something already in the price. That the fine isn’t the maximum that it could be removes some uncertainty. Thus the price moves up.

For, recall what the basic message of that EMH is. Only new information moves markets. Old information is already included in those prices. We think it’s fairly important that if you want to write about how markets work then you have a grasp of how markets work. Sadly, not all agree with what we regard as an entirely uncontentious insistence.