Can misinformation be tolerated?

In this study, we explore the dynamics of price fluctuations, caused by predatory trading, in the context of misinformation. Key findings include: a diminishing effect of misinformation on price fluctuations over time, undermining long-term market manipulation; a baseline fluctuation size anchored in factual market data, regardless of misinformation; and the inability of misinformation to reduce fluctuations, only to inflate them. A novel contribution of this research is quantifying a threshold of misinformation that markets can tolerate without any additional fluctuations to be expected, with a higher tolerance observed in more liquid stocks and markets with lower information asymmetry. Interestingly, widespread misinformation can sometimes lead to less severe fluctuations, suggesting a complex market response to distorted information. Additionally, we examine the neutralizing effect of contradictory misinformation, presenting challenges in using market data to identify misinformation. The study further highlights the dynamic nature of markets’ tolerance to misinformation, influenced by ongoing information updates, offering strategic implications for market interventions and stability. • Predatory trading under misinformation. • Price stability and additional fluctuations under misinformation. • Development of a market tolerance threshold for misinformation.