It is official. We have now taken Speakers’ Corner and put it on the internet. Except now we call it Twitter. Speakers’ Corner is an area in Hyde Park London where free speech and open public debate takes place. In the United States of America, the concept of free speech is a cornerstone of our society and is protected by the Constitution of the United States. It is the First Amendment in our Bill of Rights. It is the equivalent to the First Commandment that Moses brought forth from G-d on Mount Sinai. However, not all free speech is protected. As we have also seen in Boston, killing people in the name of G-d, or your god is immoral and not the intention of religion. In London, only “lawful” free speech is permitted. In the United States, free speech does not protect acts of slander or libel. You cannot yell “fire” in a crowded movie theater and expect to be covered by the First Amendment.
Yesterday we had an example of unprotected free speech. It occurred on Twitter. The markets dipped dramatically in an instant when the Associated Press’ White House Twitter account was hacked by offshore cyber terrorists. You see, I can call them cyber terrorists because that is protected speech. However, these cyber terrorists not only stole someone’s identity (i.e. the AP writer) but also printed false rumors of explosions having taken place at the White House resulting in injury to the President. This erroneous tweet was somewhat quickly corrected. If that was all that happened; it might not have been a problem. There was a resultant stock market reaction. What is preventing any other person from tweeting something that is false and malicious? Nothing. We have a problem; a big problem.
Nowadays algorithmic computerized trading – referred to as high frequency trading (HFTs) or robotic trading (“bots”) use social networking to ferret out information from which they can beat the rest of the world to a trade. This time, the bots detected negative information. The cyber sell buttons were activated and the market went into a free fall. It was the Twitter Crash, a mini-version of the Flash Crash. Thankfully the quick correction by AP reversed the precipitous decline in the markets. However, the damage was done. People lost money. Individuals and their pension plans suffered because: i) Twitter does not have the proper security measures in place to avoid hacking and malicious or incorrect tweeting; ii) Twitter does not protect against unlawful or unprotected speech; and, iii) our regulators did not learn their lessons after the Flash Crash and continue to allow the HFTs to run amok.
I don’t use twitter. I have no plans to use Twitter. I do have a Stock Twits accounts but use it sparingly. I have a Facebook (FB) account and use it sparingly. I have a LinkedIn (LNKD) account and have been thinking about getting rid of it. I don’t find any of those social networks as having any value. They are a waste of time and likely now one of the top three causes for loss of productivity in the workplace, the other two being smoking and coffee.
I spend more time declining to be LinkedIn or friended than using the sites. It has become the baseball card collecting of its time. People just try to collect as many friends or followers as possible. I watch as students at Seton Hall University recommend each other for their “skills” on LinkedIn just so they can get a reciprocal recommendation. Got ‘em; got ‘em; need ‘em; got ‘em. The only difference is that if you collected a Mickey Mantle card from the 1950s, it has value now. I can’t same the same for collecting contacts, friends and followings on the social networking sites.
Speaking of Seton Hall University, I asked about 100 students, in an unscientific way (so please don’t compare what I am about to say to the Reinhart-Rogoff / Herndon imbroglio) how they got their information for the Boston bombings. An overwhelming majority responded that CNN (a division of Time Warner (TWX)) was their primary source. Most of the rest responded that some other traditional media outlet was their source of information – network or cable TV and local TV or radio. CNBC and NBC (both owned by Comcast (CMCSA) ) or CBS (CBS) being the most popular after CNN. Only two responded that Facebook was their source. None responded Twitter.
What shocked me as well yesterday was the fact that people are sitting on trading floors looking at Twitter for information. As an investor, it has zero utility for me. I guess some traders find it important yesterday, but as we saw, they act on nefarious and incorrect information. So what value does it really have? How can you filter out the correct from the incorrect? I recall being on the Morgan Stanley (MS) trading floor in 1986 when the Challenger Space Shuttle exploded. We knew almost instantaneously what happened. We did not need Twitter. We were also able to confirm the incident from multiple sources. With Facebook, Twitter and LinkedIn as your primary information source, you are putting your money at risk. Also you are letting all the wrong people cause you to take the wrong actions.
I was sitting with my intern Ben yesterday when the Twitter Flash hit. We were watching Bloomberg at the time. I said to Ben, quite nonchalantly that something must have happened but since Bloomberg was not reporting anything, it must have been a market glitch. We went back to work researching a company that we have an interest in. If I were paying people to perform risk management and research and they were doing so via social networking, I would fire them right away.
I received 200 shares of FB for a client on the IPO day and put in a sell order immediately. I can’t say we top ticked the stock but we made a healthy profit. Since then, I have played FB from the short side. LinkedIn has been a mo-mos (momentum traders) dream and bear killer. It will turn out to be the short of a lifetime like many Web 1.0 internet companies were, but not just yet. Wait till it misses a quarter and watch the mo-mos head for the hills. I have an opportunity to invest in Twitter for myself and accredited clients. I am passing on that opportunity.
So, what do we need to do going forward:
- The SEC, Congress and regulators need to take decisive action against bots and HFTs. Stop going after the banks for the financial crisis. We have a real specter of financial problems to deal with electronic trading.
- Social networking sites must develop quality control because for the most part it is nonexistent now.
- Put human beings back into the process. Social networks don’t have editors as do traditional news sources. So perhaps some form of electronic filtering needs to take place and then a human being needs to intercede. The stock market is pretty much all electronic now. The flash crash might have been avoided if we still relied on the specialist system. We have to accept the benefits of technological advances but let’s not lose the benefits of the human touch as well. We have robotic operating systems such as those developed by Intuitive Surgical (ISRG) but we still have doctors and nurses performing the surgery.
- Learn from history such as I outlined last week in My Gut Feeling for April 16, 2024 or from other events such as The Flash Crash, the Challenger explosion, etc.
- Practice Safe Sex Investing – I espouse this to students and investors all the time. Know where your information is coming from. Usually you get what you pay for.
- Spend more time before making an investment decision – do you know that people spend more time researching a $25,000 automobile purchase than a $25,000 trade or investment. That is insane.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL and CAT stock— although positions can change at any time.
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant and agricultural stocks. You can subscribe at www.restaurantstox.com
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