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Twitter-Fed Trade Flow

Capital Beat blog: They’re fast, yes, but are Tweets reliable?

It seems everyone is on Twitter these days, and all those tweets mean potential Alpha for traders. StreamBase Systems, a software company that counts the Central Intelligence Agency’s venture arm In-Q-Tel as an investor, is bridging the tweets with the trades.

The Lexington, Massachussets-based company is currently working with a couple of hedge funds who use news-driven trading strategies and incorporate the micro-blogging site into their trading platforms. StreamBase’s complex event-processing mechanism, or CEP, can search and analyze Twitter messages related to particular stock and then transmit that insight onto automated trade systems. “Twitter is a natural extension of news sources for automated trading,” says Mark Palmer, CEO of StreamBase. “It offers traders real time insight into what the herd is saying.”

Herd indeed. Since its founding three years ago, Twitter has become a phenomenon. Some estimates put the number of site users as high as 2.5 million and the total tweet-per-minute rate at 13,000 tweets. Twitter users have stirred the media world by breaking news on events as varied as the upheaval in Iran and the forced landing of US Airways flight 1549 in the Hudson River.

This kind of speed and immediacy can be a real edge in the world of millisecond trading.

But there are skeptics. Jeffrey Meyers, president of New York-based Cobia Capital Management, says he’s not sure how meaningful Twitter really is. “You don’t know who’s on,” Meyers says. “It may be more useful to analyze what’s on Yahoo message board because everyone there is an investor.”

Reliability is another concern. Twitter is not the best messaging platform, and has frequent technical bottlenecks (Tweets about Michael Jackson's death overwhelmed the Twitter servers) because of its astronomical growth in usage. “It doesn’t have the robust security and latency that’s required by trading systems,” Palmer says. “Then there’s the legal and ethical issue surrounding using this public information.” He cites last September’s false Internet alert that United Airlines had filed for bankruptcy. The posting drove United’s stock down to $3 from more than $12 in less than an hour. “Who bears responsibility in this kind of situations?” Palmer asks.

But for traders, more is often better. “The more sources of information you have, the better informed you are,” Meyers says. The key is knowing how to separate the truth from the lie.

Xiang Ji (Nina) is the capital markets reporter at Institutional Investor, covering mergers and acquisitions, debt and capital markets from an institutional investor’s perspective. Xiang Ji was formerly with BusinessWeek in China covering the wider business world. Send email to capitalbeat@iimagazine.com .

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