Friday, May. 29, 2009

Turning Wall Street on Its Head

Twitter will become a huge platform for discussing stocks and other financial instruments and will probably replace message boards like the ones at Yahoo! Finance as the preferred method for discussing individual public companies. The size of the Twitter audience makes it possible for groups interested in one stock to post opinions on that company, trades, research, rumors and data directly from the company in real time. A stock with a large shareholder base could have a following that brings in thousands of comments a day. This kind of information market for stocks has already begun to emerge through services like StockTwits. Communities of active investors and day traders who are sharing opinions and in some case sophisticated research about stocks, bonds and other financial instruments will actually have the power to move share prices. In the cases of some smaller and thinly traded stocks, this power could be used to spread rumors and influence trading patterns. At some point, Federal Government agencies like the SEC will have to examine how Twitter users access the service to spread information about public companies. Some of the comments are likely to be misleading, as occurs on message boards, because some investors will seek to manipulate share prices up and down based on their volume of messages and those they can get their friends and affiliates to tweet. (See pictures of the stock-market crash of 1929.)

As this function of Twitter use grows, the community of commentators on a publicly traded company could become nearly as large as its stock's daily volume, making Twitter-based input as important as any other data to the stock. Yahoo! and other large message boards may start to supplement their services using Twitter, extending the power of the medium to pass along information whether it is accurate or not. Twitter is one of the most disruptive technologies to become part of the financial markets in decades. It will allow individual and professional investors to exchange hundreds of thousands of bits of information about the markets in remarkably short time periods. The problem is that a great deal of this information will not be correct.

For those who do not have money to put into the stock market, Twitter will be an ideal platform for fantasy stock-trading, in which people post the price at which they would buy or sell a stock. That could become part of a large contest among people who want to compete to show who can create the best-performing portfolio, even without money.

Douglas A. McIntyre

Watch TIME's video of Peter Schiff trash-talking the markets.

See the top 10 financial-crisis buzzwords.