Information is the greatest commodity on Wall Street. It’s traded infinitely more than stocks and bonds. All investment decisions are made using it (I hope). Sure, there’s some gut instinct thrown in there for good measure. But overall, every buy and sell ticket has some information and analysis behind it. And the way in which information is being provided and consumed on Wall Street is ever-evolving.
Look no further than recent history to see how the use of technology has changed the flow of information in the financial industry. In the 1990s, the Internet was taking hold, and it brought with it both opportunity and fear. The world around Wall Street began to speed up. Trades that used to take five days were settled in three, and the ability to communicate and obtain information exploded. The advent of Internet technology and e-mail leveled the playing field for many investors.
By 1999, AOL Instant Messenger (or “AIM”) was on almost every professional trader’s computer. It became the fastest way to pass information to a wide audience. And the technology was ahead of its time – texting, Facebook, and Twitter weren’t a thing yet. Its use was paramount if you wanted your finger on the market’s pulse. Trying to conduct business without AIM was like asking a surgeon to operate one-handed. If you weren’t on AIM, you were two steps behind. Everyone was using it to collect and share information.
Over the last five to 10 years, we’ve seen a transition toward social media – Twitter in particular – and chat rooms as a major source of information for the financial markets.
For a brief period, Goldman Sachs forbade the use of AIM due to the impropriety risks. But that lasted for about a minute when the company saw how it was hurting commission totals. At first, the medium was an advantage for traders. But as AIM’s popularity increased, the playing field was leveled again. After almost a two-decade run, AIM was shut down for good on December 15, 2017.
Over the last five to 10 years, we’ve seen a transition toward social media – Twitter in particular – and chat rooms as a major source of information for the financial markets. Digital communities exist where like-minded traders and investors can interact with each other and share recommendations and ideas. Today, access to real-time updates and market news is an integral part of trading stocks.
Social media has become a key element of the “mosaic theory” of investing, which involves collecting public and private data and information to determine the value of a security. I spoke with several investment professionals who told me they’d have a difficult time being as productive and effective without social media, but using it intelligently has become a necessary skill set.
But a trader’s use of social media doesn’t come without risk. The Internet is an open source, full of “experts” who tout their opinions and spread rumors. And very often the information is “managed” before it’s even delivered. The provider of information controls what – and how – content will be told. Depending on the size of the audience, misinformation can result in catastrophic losses. And when everyone is trading on the same information, there’s little money to be made.
Chat rooms have become a way for traders to find new information outside of the mainstream. They are often filled with market observations, rumors, and trading ideas… And an active chat room can sometimes have as many as 2,000 members. The information flows all day, every day.
Some consider the role of social media in trading to still be in the early stages, but there’s no doubt that it’ll continue to be a primary source of information. It’s become widely accepted and considered a necessary part of the equation.
So whereas social media has played a major role in providing and spreading information, it also transcends it. Many hedge funds and savvy investment professionals mine the data on platforms like Twitter to forecast future stock prices. The collection of data is analyzed and scrutinized to help predict market trends and movements.
One of the major focuses of this type of analysis is to measure sentiment. The idea is to determine the market’s attitude on a particular product, stock, or asset. Additionally, it’s designed to alert market-moving events, such as breaking news, which could have an impact on a stock, sector, or the entire market. Alternative data research was once primarily associated with quantitative funds, but given the ultra-competitive nature of the industry, traditional hedge funds and investors have started paying attention.
Some consider the role of social media in trading to still be in the early stages, but there’s no doubt that it’ll continue to be a primary source of information. It’s become widely accepted and considered a necessary part of the equation. And a new generation who has never lived without social media is entering the workforce. The way we trade securities and share information has changed dramatically over the years… And it will only continue.
You can find a lot of good traders out there in any given market. In certain markets, technical analysis might work great. But for traders who were relying on it in 2008, it got ugly. Great traders can identify what kind of market they’re trading in and adapt. It’s a skill set not many have.
It’s impossible to predict where the next wave of information flow will come from, but if you want a chance at succeeding, you better get up to speed – quick.
Turney Duff is a former trader at one of the biggest hedge funds in the world, the Galleon Group, where its founder and several Galleon employees were found guilty of insider trading. Turney rose through the ranks and then fell prey to the trappings of Wall Street: money, sex, drugs, alcohol, and power. Turney chronicles his spectacular rise and fall in his bestselling book, The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess.
