Buy the rumor, sell the fact
It's one of Wall Street's oldest maxims.
For traders, the idea that you can thoroughly investigate each rumor and determine which are important and which are factual, all before the price moves, is folly.So, traders trade the rumor. In bull markets, that means they buy the rumor, then sell when the news come out. In bear markets, they short the rumor, then close the position on the news.
Yesterday, this blog got into a bit of a kerfuffle when it reported on how web news outlets and Twitter were covering the rumor that Blockbuster (NYSE: BBI) might be preparing to file for Chapter 11 bankruptcy. That post noted that the story, which originated on Bloomberg News, was quickly picked up via Twitter, while traditional web news outlets such as Google and Yahoo trailed.
While my blog post was focused on how the news spread through the web, it was picked up by FT.com's Alphaville as part of a story noting how the rumor was incorrect. So, that got me thinking about rumors and Twitter, and whether the 140 character limit might cause rumors to be spread with less background information.
140 characters is not a large canvas. Even for the artful editor, communicating a topic in 140 characters can be a challenge. Yet one of the great things about Twitter is its ability to include links, usually in about 20 characters thank to Bit.ly or TinyURL. So, the user is typically left with 120 characters in which to communicate their message, leaving room for a link.
In this case, a better tweet might have been something like:
Blockbuster ($BBI) hires law firm Kirkland Ellis, explores various strategic alternatives for capital http://bit.ly/PBk4s
But traders are not editors; they pick up on rumors, act on them and sometimes, share them.
Now, let's look at the impact of this. We can start with the timeline of events. This is based only upon what I can see from the Internet. I'm not looking at the underlying news pipes or tick streams.
2:01pm Initial story posted to bloomberg.com, BBI trading at $0.79
2:06pm BBI trading at $0.37
2:07pm First tweet seen on StockTwits
2:10pm BBI trading at $0.18
2:13pm Briefing.com headline reads " following Bloomberg headline saying co hired Kirkland & Ellis for bankruptcy advice"
In looking at the timeline, it seems that the Twitter element was not a big factor in the sell-off. In essence, the story is that Bloomberg posted a story indicating potential adverse news for Blockbuster and the markets quickly responded, tanking the stock. From that standpoint, this is no different than thousands of other market events in the past. There's a sign of possible trouble with the stock, traders trade on that rumor, then the final news comes out.
I'd also question whether the final news really dispelled the rumor. Blockbuster quickly came out with a response, saying they were not filing for Chapter 11. But the reality is that they've hired a law firm to help them deal with impending capital challenges. The ultimate outcome of that may or may not be a bankruptcy filing, but it's clear that the already distressed company is liquidity-challenged in a very difficult credit environment and that they've hired Kirkland & Ellis, a bankruptcy counsel.
Returning to the premise of this post, though, is 140 characters appropriate for sharing information? While it has its limitations, they're no more so than those of the traditional media for spreading rumors - the telephone or the trading floor. And, while I'd encourage tweets to include a link to supporting data, the goal of the tweet is not to provide a detailed analysis of the situation but rather to give a quick alert that something is happening. Could Twitter be a tool that people could use to knowingly spread false rumors? Certainly. And that creates opportunities for sites like StockTwits and others, to define ways in which participants earn trust from the community.
