It’s no surprise that Twitter – the ingenious and versatile social platform – has been called the “new ticker tape” and is hailed as a valuable tool for gaining an edge in the markets.
After all, dating to the advent of carrier pigeons, every technology breakthrough finds financiers and speculators among the earliest adopters.
The first ticker-tape machines were installed in only a handful of New York banks. Big investment firms were among the first to buy access to undersea telegraph cables. Cheap fiber networks spurred the creation of high-frequency trading bots and $8 online stock trades.
As for Twitter, as far back as October 2010, an academic paper asserted that its "mood predicts the stock market.” New research from the MIT media lab finds that “social traders” – those who monitor peers’ ideas and investment activity – seem to have better trading results than others.
A firm called DCM Dealer captured some buzz early this year by offering a Twitter-based trading platform utilizing stock intelligence from streams. And a spate of Twitter-centric research outfits promote themselves as superior alternatives to traditional brokerage-house stock picking.
There is no doubt that, as a customizable, scalable information- processing utility, Twitter has become indispensable and will require expensive news and research providers to adapt or die. For example, when news of the onerous bank-bailout terms for Cyprus broke, Twitter is where it was first disseminated, analyzed and debated, prompting excited chatter about the network’s power to outmaneuver entrenched finance providers.
But over the longer term, Twitter and other social networks likely won’t give investors or traders a significant edge in the markets. Twitter is fast and powerful but also free and ubiquitous – therefore it delivers no reliable competitive advantage. It offers crowd-sourced intelligence, without context or analysis, minus whatever data points or interpretive gems plugged-in investors have already traded on.
The same media researchers at MIT determined that social traders “are prone to much riskier behavior when following their peers, and are much likely to overreact when their peers are doing so and the market is uncertain.”
Like every new democratizing technology, Twitter’s advantage will expire quickly. The proper analogy is the advantage gained by the first spectator to stand for a better view at a ballgame: It lasts until everyone stands up, affording the same imperfect line of sight as before, with less comfort.
Howard Lindzon is an investor and founder of StockTwits, an online forum for sharing investment ideas and corporate news, which started on the Twitter platform and now operates independently. He began cultivating a Twitter investor network in 2008 and says, “I feel like I have an incredibly critical five-year head start over people just starting out. I have an inside feel for what I call the social tape.”
A mere start, not an end point
Yet at this point, he believes it will the be providers who create filters and subject-specific “verticals” atop the raw Twitter conversation who deliver value to traders and investors. Just getting a better sense of real-time market psychology and interpretations is a mere start. “It’s not easy,” Lindzon says. “But nothing’s easy.”
Digitally combing Twitter for trader sentiment trends about individual stocks is among the more common and seemingly useful value-added overlays on Twitter. But, again, it’s far from clear that over time such gauges will continue to offer reliable clues.
Leigh Drogen, a former StockTwits executive who started Estimize to capture the collective wisdom of analysts at investment funds and others, thinks of Twitter as a virtual re-creation of the real-time market chatter and insight-sharing that used to occur on exchange floors. “Twitter is now the protocol for discussion and information-generation,” he says.
Estimize integrates buy-side intelligence on profit estimates that tend to be more accurate than Wall Street analysts’ consensus. Last week it announced its estimate feed will be included on Bloomberg’s data terminals. The better estimates are certainly valuable. But the real value will be pulled by the quantitative-investing firms that license the platform in order to convert the data into trading strategies.
The immutable facts
Better technological tools never change a few immutable facts about investing: Someone is always able and willing to pay more for faster or better information. Inherent behavioral tendencies lead to certain persistent mistakes that broader access to crowd intelligence can’t overcome. And as fast or inclusive as an information platform is, it's never faster or broader than the public markets themselves.
Consider how earlier tech advances were heralded on Wall Street. Jim Cramer, the hedge-fund runner and TheStreet.com founder, wrote in 1997: “The personal computer can make you just as smart and just as knowing as the best hedge fund managers. You can receive documents in a flash from the SEC. You can call up the [Wall Street Journal’s] stories about a stock as fast as I can.”
This was true; the Web democratized investing. But it didn’t help the little guy, in any consistent way, do better than the pros. New technology can make an investor better than he or she was, or otherwise would be, but not necessarily better than the rest of the people also trying to extract returns from markets using similar tools.
Ironically, the hype is concentrated on the real-time intelligence-gathering capacity of today's technology. But the true advances for small investors have come in free or cheaper investment information, tax-efficient exchange-traded funds and ultra-low trading costs – not real-time performance advantages.
In The Money Game, the classic book about Wall Street during the mid-‘60s bull market, the game-changing tool wielded by rocket scientists was mainframe computing. “The graduate students get time on the local IBM 360 to relate every number and price and trend they can think of to every other number they can think of, and a few nanoseconds from the IBM 360 gives everybody a few months’ more work after that,” gushed the author, known as Adam Smith.
This was genuine progress at the time. But it wasn’t enough for long enough to help the early adopters make easy money, as the rest of the world quickly plugged in.