Trading on thin air

Blog first appeared in DanCollinsReport on Apr. 29, 2013

How could so many traders react to a false piece of information without confirming it someplace? This apparently is what happened with the April 23 min flash crash.

The most successful traders that I have interviewed — and I have interviewed a lot — take a long-term approach to trading and information. Even those who choose to trade from a short-term perspective, taking a few ticks from the markets a couple of times a day, base their strategies on a mountain of research. While most of these traders are technical, even those who primarily look at the market from a fundamental perspective have a broad view of the fundamentals. They are not reacting to headlines without also having a more solid understanding of the macro fundamental landscape.

I haven’t heard all of the details on the April 23 mini flash crash, just that a group dubbed the Syrian Electronic Army hacked into the AP Twitter account to place a false tweet stating that he White House was being attacked and the President may have been injured. The false story caused a quick drop in equity indexes, which recovered just as quickly.

This has caused a lot of concern regarding those that lost money but I don’t understand those traders who saw this tweet or heard about it second hand and decided to dump stocks without getting any confirmation. I am not sure on the details of the sell-off but several reports indicated it could have to do with some automated systems that monitors twitter feeds.

TRADING THE HEADLINES

I was amused but not terribly interested in stories coming out in recent years about traders building trading systems based on a systematic analysis of social media posts. For example, one scoring positive and negative tweets. It seemed silly to me and I didn’t place must stock in it, nor would I trust my money with someone without a stronger method for selecting trades.

Before I reported on markets, I spent more than a decade working on the trading floor of the Chicago Board of Trade and Chicago Mercantile Exchange and I learned that often—more often than not—the first reaction to news was wrong. Be it an unemployment report, GDP, PPI, CPI or, in particular, the results of a Treasury auction; the market would react one way and then quickly reverse course and whipsaw causing huge losses for those traders first to act thinking they had some edge. And that is when the news is REAL and traders reacted to the headline number without looking at the more detailed report.

Once I moved to journalism I enjoyed writing for a monthly publication because it afforded me the time to learn about an event and tell a story after speaking with multiple sources and could offer insight as to the importance of a news event or policy shift. While it is fun to be first or get a “scoop” I realized that often these first reports on certain events or announcements are wrong. I felt lucky that I didn’t have to post a story without knowing all of the details. I felt bad for wire reporters with editors demanding a story on an event where the details were not clear and they had to rely on uncertain information.

Of course the growth of the web and website commitments have in a sense turned all of us in the media into wire reporters with demands to get something up immediately when breaking news happens.

I never was as open to using unnamed sources as many of today’s media are, and worse posting material based on other news sources’ stories citing unnamed sources. I have had arguments over the wisdom of posting widely distributed un-sourced stories. Someone would need to have a very compelling reason why they wouldn’t put their name behind any information they provided me for a story for me to use it.

I am not as big a fan of Twitter as most. At Futures Magazine I thought it was a great tool to market our daily material. If we posted a solid story or if one of our contributors put out a timely piece of analysis Twitter helped us alert readers to that story, people could see it hit the link and get the valuable information. While strong headlines and teasers are important, it is so because it draws people into a solid researched piece of journalism.

Just think, how often have you been disappointed with a story because it did not match the titillation of the headline. Unfortunately we live in a world where many people—even fellow journalists—only read the headline or tweet.

Twitter is a strong tool to alert you to information but I would not trust it as the sole source of information and I have never been interested in the narcissistic ramblings of celebrities and professional athletes.

It surprises me that so many people would put money on the line based on a tweet but I figure those that did would probably have been separated from their money soon enough.

About the Author
Daniel P. Collins

Editor-in-Chief of Futures Magazine, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures in 2001 and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.

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