Remember when investing was about reading financial reports, following news, anticipating cash flows, inferring the impact of monetary policy on risk prices, occasionally looking at charts (because while traders say past performance is not predictive, virtually everyone expects a chart to forecast precisely what will happen). Well, now it is about simpler things: like what asset will China's great bubble-chasing army send into the stratosphere or, as has been the case over the past few weeks, what will Donald Trump tweet about next.
However, as Wall Street's traders, starved for alpha, scramble to convert Trump's tweeting into profitable trades, they have run into problems, and as the WSJ writes, "investors are grappling with the president-elect’s highly visible but capricious social-media presence, which is upending well-worn Wall Street formulas for assessing the likelihood of certain developments and baking them into market prices." Specifically, Trump’s tweets are challenging large firms to funnel his off-the-cuff remarks into trades in an age of increasing automation, "while forcing banks to revisit restrictions on social-media use. At the same time, the tweets are creating openings for smaller investors to make money on abrupt market moves."
The first problem, of course, is that with many Wall Street firms having banned Twitter, their traders are flying blind in an age when Trump's tweets have become the biggest market moving event on any given day. For example, at Mizuho in New York, foreign-exchange trader Daniel Riveira said last year he began discussing with co-workers plans to get the Japanese financial firm to lift its longtime ban on Twitter after Mr. Trump’s threats to revise trade policies with Mexico prompted a sharp decline in the peso.
This month, Mizuho granted read-only access for its U.S. banking staff, according to a spokesman. The firm said it lifted the ban to give traders greater access to market-moving information, not just to Trump’s tweets.
“We never thought we needed it before,” said Mr. Riveira, who is a managing director at Mizuho. Now, “the people who have Twitter are going to have an advantage over those who don’t.”
And yet somehow, Jack Dorsey is still unable to boost the value of Twitter, whose market cap is 30 times lower than that of FaceBook, which is despite allegely used by everone, hasn't moved a market in years.
Meanwhile, Trump has tweeted more than 300 times since the election. Excluding media companies, he has called out publicly traded companies by name or product in 18 separate tweets, including Boeing Inc., Ford Motor Co., and United Technologies Corp. unit Carrier Corp. Big firms haven’t been the only targets. Shares of Rexnord Corp., a maker of bearings and gears with a market capitalization of $2.2 billion, fell as much as 2.5% last month on the first trading day after Mr. Trump took aim at the Milwaukee company’s plans to move jobs to Mexico. Trading volume was double the daily average.
Twitter's market influence is so big that it has become a daily part of strategist decision-making.
“I used to ask our analysts what was happening with the S&P, or what Janet Yellen said,” said Larry Adam, chief investment officer for the Americas at Deutsche Bank Wealth Management. “Now I also ask if there are updates I need to be aware of” on Twitter.
* * *
As the WSJ notes, so far trading on Trump’s tweets is skewed toward younger individuals, traders and analysts said. An E*Trade survey earlier this month of more than 900 active investors with at least $10,000 in an online-brokerage account found that three-fifths of those aged 25 to 34 had traded based on a tweet by Mr. Trump. Among those between 35 and 54, 36% had done so, and among those 55 and over, 20% had. Well, hedge funds have always complained there was no dumb money left in the market, here's their chance to finally make alpha courtesy of all the newly minted "traders" who respond to nothing more than a Trump announcement.
However, while it would be easy to fade Trumps tweets - assuming banks unblock twitter that is - a more significant problem has emerged for most large trading firms, which are increasingly dependent on electronic algorithms that can be programmed to buy or sell an instant after an economic-data release or corporate-earnings report. The issue is that algos are unable to immediately infer whether Trump is bashing or praising a company, as the unscripted nature of Mr. Trump’s tweets poses a challenge.
High-speed trading strategies can quickly identify that a stock was referenced in a tweet. But discerning whether the underlying message is bullish, bearish or indifferent presents a significant programming challenge.
And just like that, courtesy of his head-scratching tweets, some of which arrive in ALL CAPS, Trump may have eradicated the HFT scourge which has been slayed by Trump's linguistic finesse, or lack thereof.
“You have an issue of interpreting through language, that’s the first problem,” said Blair Hull, a pioneer of electronic-trading strategies and founder of Ketchum Trading LLC and Hull Investments LLC. “Experts in linguistics have been working on this for years and still don’t get it right.”
* * *
There are more problems: a big one, is that the small number of examples limits a machine’s ability to see consistent patterns. It took at least four seconds after Trump’s Jan. 5 tweet attacking a Toyota Motors Co. plan to build a plant in Mexico for the first trade in U.S.-listed shares to hit the tape.
Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.
— Donald J. Trump (@realDonaldTrump) January 5, 2017
That is practically a lifetime for high-speed traders who blanch at delays in the milliseconds, and who spend millions to relay their trades to the NYSE using lasers instead of using "ancient" microwave technology, in hopes of shaving off microseconds.
Rather than rely on machines to make murky real-time decisions, Hull said, some of his firm’s trading strategies use analysis of shifts in mood caused by tweets as they slingshot across the internet.
“The trading opportunity in a president who tweets isn’t so much in the immediate tweet as much as the fact that he’s starting a conversation about an issue,” said Jamie Wise, founder of Buzz Indexes, which creates a benchmark of stocks based on quantitative analysis of comments made across social media.
The good news for bank traders, of course, is that they will all soon have access to the social network, alleviating hours of boredom.
Banks are in some cases being forced to rethink what has been a chilly relationship with social media. Bruce Klaw, an assistant professor at the University of Denver and former white-collar crime attorney, said recent scandals involving rigging of the London interbank offered rate have led banks to restrict the use of the internet and personal devices while at work.
There is a financial motive behind the restrictions, as well. “You don’t want your traders who you’re paying a ton of money to be on Twitter all day,” he added. Now, thanks to Trump, you have no choice. Which likely will mean that as trading becomes increasingly more reactive instead of proactive, and discounting, trader comp may well tumble even more.
Meanwhile, Tweets are increasingly becoming part of Wall Street's analytical engines. While many big bank employees are blocked from visiting Twitter.com while in the office, at institutions such as JPM and Morgan Stanley, traders use their Bloomberg screens to track tweets. At Goldman traders can see key tweets and follow individuals through Symphony, a messaging service operated by Symphony, which is partly-owned by Goldman.
Yet even with everyone having access to Trump's tweets, the underlying problem remains: he is so unpredictable that humans, let alone algos, have no idea when or why Trump, who has tweeted at all hours of the day, can strike.
Trump’s lack of predictability has a way of frustrating Wall Street. A year-ahead outlook presentation in December by Bank of America Merrill Lynch biotechnology analyst Ying Huang asserted that “the Republican sweep of Congress should ease manufacturers’ worries of drug pricing legislation.” As Huang spoke, drug stocks slumped, reflecting a comment by Trump in Time magazine that he aims to bring down drug prices.
“It’s a brave new world,” said Brett Hodess, head of Americas equity research at Bank of America.
And it all revolves around Trump's twitter feed - just as he wants it. In fact, at this rate Trump's tweets will soon... er, well ... trump the Fed's own announcements in terms of market-moving importance.