Once upon a time, if you wanted to be privy to the latest market whispers and chit chat, you needed to hang out on the floor of the New York Stock Exchange or one of the Chicago futures markets. From there, you could keep an eye on which traders were placing repeated large orders for specific stocks while figuring out who those traders were known to transact business for.
With the widespread shift of trading off exchange floors and onto desktop computers and other devices, we lost a centralized location where folks could pick up that kind of market chatter and gossip, the kind of place that has existed since stock traders met in the nave of an Amsterdam church in the 17th century to swap stakes in voyages of exploration to the spice islands.
Or did we? As recent events have reminded us, we may actually have done no more than replace a real place with a location in cyberspace. When Carl Icahn opted to reveal his stake in Apple (NASDAQ: AAPL), he simply tweeted it to millions of folks.
And while some have commented that Icahn’s announcement shows just how big-name investors can manipulate the markets, the reality is that Twitter may also have accomplished what the SEC has tried to do for decades: Create a slightly more level playing field for all investors. You didn’t have to know how to scour an SEC filing or have access to a network of sources to hear the news; you simply needed Internet access (and enough of an interest in either Icahn or Apple to be monitoring news relating to either of ‘em).RELATED: CARL ICAHN CAN'T SOLVE APPLE'S REAL PROBLEM
Does this mean that we’re headed for an era of perfect transparency? Nope. Whoever snapped up those Apple shares for Icahn had access to proprietary information, so insider trading clearly remains a risk for market participants, as it always has been. Nor does the Twitterverse address the challenges created by the world of “dark pools” and high-frequency trading that can temporarily side-swipe markets (remember the “flash crash”?) and create puzzling patterns in any given stock on any given day. But it does give the ordinary investor access to considerably more information of a kind that was once only shared among people who earned their living on Wall Street, assuming that the investor is able and willing to do the work of setting up the right kind of search metrics and due diligence on sources.
Of course, this new kind of transparency comes complete with new kinds of risk. When Icahn hit “send” on that tweet about his Apple stake and his quest to get the company’s to use more of its cash for stock buybacks, he was doing so for a reason. He wanted that information to be public, and a savvy investor needs to ask why. Part of the reason, certainly, was to whip up public support for his idea and add to the pressure he intends to place on Apple CEO Tim Cook. But it’s also worth remembering that Icahn had already established his $1 billion stake in Apple. If you bought the stock in response to the tweet, congratulations, you just helped to make Icahn a lot richer. Apple’s market value jumped by some $20 billion in two days.
It’s very unlikely that Icahn will tell you in advance via Twitter that he’s decided to sell the stock. You’ll only know that after the fact, when he has unloaded it or when the SEC requires him to disclose that information. Icahn and his peers will provide real-time insight only when it suits their best interests, not when doing so would hamper their abilities to sell out of a position by causing others to try to sell too.
Tweets also create their own momentum: With millions reading them at once and trying to act on them, the result can be a kind of market stampede of the kind that we saw earlier this week when Apple’s stock shot higher. You may have a more perfect knowledge – you know what Icahn has done, because he has disclosed it publicly, and you don’t have to rely on someone else telling you what has happened. But the market’s response may be fast and furious, leaving little room for the kind of reflection that, ideally, should accompany any investment decision. You can end up chasing the market higher, only to be left high and dry when the momentum abruptly reverses.
If you’re trying to manage your own investment portfolio and you don’t keep tabs on Twitter, among other sources, you’re increasingly likely to miss key market-moving information. But it’s just as important not to place too much weight on social media. Just because you are part of the digerati doesn’t mean you are also part of some inner circle on Wall Street. Unless your best friend has been feeding you insider tips, you’re not. (And if he has, then you’ve got other, bigger problems to consider.)
Twitter is a great way to identify and capture momentum plays, or to choose exit or entry points into stocks that you already find interesting or overplayed. At the end of the day, however, it’s just another tool in the trading toolbox.