Is social media so prescient that it can predict the moves in the market? No, but it’s a good place for information. Many traders have been using Twitter for some time.
It’s gotten so prevalent, hedge funds are beginning to use it and incorporate it into their algorithms.
Hedge funds don’t tweet a lot, but they like the informant in the back of the room, monitoring everything.
von Hayek believed in the wisdom of crowds. The question is this, is there enough meaningful tweeting going on to consider it a crowd? Certainly, in news, politics, and pop culture there is. I am not so sure yet about Twitter and markets. I have gotten some good trades off twitter, but some bad ones too! But I think that there needs to be some more layers to really make it go.
The first layer is up to the second financial information. News services need to tweet the info as fast as the old Reuters boards on the floor did. It would be nice if they signed up for Stocktwits and tweeted where the traders were, not just into cyberspace, hint hint.
Reporters also need to add to the stream. Instead of retweeting figures, post some stuff that is a little more in depth-that’s the second layer.The third layer is the traders themselves. You have to add good info to the stream if the stream is going to be valuable.
In an old blog post, I talked about how in the pit, sometimes traders would step out and then bids or offers would congregate around that price. A reasonably good sized bid by a bunch of locals could stop a market. Enough communication on Twitter and you could see that happen again. Control of the market could go from the machines back to humans. Machines aren’t always right.
The key to success with social media and trading is to pick who you follow wisely. Follow a bad tweeter, get bad information. That is not a lot different than the old trading pit. Follow a bad trade, or get information from a bad source and you lose money. There is a hedge fund starting in April that will try to categorize tweets and make money off sentiment.
I downloaded the new Seesmic desktop to my computer yesterday. So far I like it. I can monitor lots of different feeds easily. With the Stocktwits plug in, it makes it a lot more efficient to interact.
If you haven’t gotten onto trading + Twitter yet, give it a try. The worst that can happen is you still find it meaningless and you get rid of it. The cost for investment is just your time.