Make Millions in the Stock Market Just by Reading Twitter?

Should sentiment information be regulated like insider information?

Twitter
Should Twitter be regulated by FINRA and the SEC?. Photo Credit: Mike Kemp/99276787/Getty Images

Last week a story was reported by a number of​ media outlets that probably didn't get as much coverage as it should have.  The gist of the story was that a random, rouge, probably communist trader made a boat load of cash in the market just by reading Twitter.

From the NY Post;

A savvy stock trader scored a $2.4 million windfall by using a tweet about a possible tech deal to outrace a herd of rival bulls.

The unidentified Wall Street whiz paid $110,530 on Friday afternoon for the right to buy around 300,000 shares in computer-chip maker Altera at $36 a share, according to reports.

At the time, Altera was trading at about $34.76 a share, and the trader’s “call” options cost a measly 35 cents each because the stock ordinarily wouldn’t be expected to hit the $36 mark.

But within just 28 minutes, Altera shares had soared in the wake of a Wall Street Journal reporter’s tweet that the company was “in talks” to get bought out by Intel, reports said.

At Friday’s 4 p.m. closing bell, Altera’s price was $44.39 a share, up 28 percent.

By exercising the options to buy the Altera stock at $36 a share, then selling it for more, the trader made about $2.4 million in net profit, reports said.

Yes, you read that right....$2.4 million Simoleons.  Just from reading Twitter.  Which begs the question, should sentiment information -- like the kind gleaned from Twitter -- be regulated by FINRA and the SEC?

For a moment let’s forget the question of the validity of a method based on Twitter sentiment, and just assume it works.  Now the information on Twitter is definitely not insider information as it is just the opinion of either a key analyst or financial personality -- or in some instances, the aggregated sentiment of the Twittersphere as a whole.

 But, if that information can move individual stocks, then it has the same de facto effect.

Let's take it even a step more.  What if Twitter, or an employee of Twitter, were to create an algorithm that identified potential market moving tweets, held them up just momentarily, and placed a trade in accordance with the sentiment of the tweet?

In essence what we are talking about is a modern day version of "past posting," a scam used by con men in order to get their bets down before the public in horse racing, having already learned the results. For reference watch the movie "The Sting."

So what do you think?  Is this something where the regulators should get involved?  Or do you think that the idea of trying to trade off of Twitter info is so dicey at best that even though one or two traders here and there might make some money, the vast majority of them are going to blow their accounts up?

I tend to lean towards that later idea.  I'm not a fan of regulators in the first place and am loathe to encourage them to get more involved in the markets than they already are.  And I do think that this "win" is an outlier event.