Traders are in a frenzy of instant messaging all day long. The best ones, at least. A recent study says the best traders are the ones that IM the most and the least successful traders were the ones that IM the least. So, it seems like if you can find a way to jump on the bandwagon, you can beat the odds, too. But, what's their secret? Are they passing around insider information?
Nope. It turns out that the secret is in the phenomenon of instant messaging itself. While IM-ing, traders unknowingly exhibit swarming behavior, like fish forming a school to make themselves look bigger to a predator. In the Wall Street world, the predator is the overwhelming amount of information they have to analyze to make a decision (economic predictions, press releases, quarterly earning statements.) So, they IM each other to try to make sense of it all.
According to the study, traders have up to 16 IM conversations going on at a time, and most of the time, they end up trading the same way as the people they are talking to, causing the stock to move significantly in one direction. Syncing makes it easy to ride a stock's rise or get out while it's plummeting. According to the study, traders "acting at peak moments of sync made money on more than 70% of their stock trades. They also made nearly twice as much money per trade, which explains why traders who frequently 'sync up' were the best performers at the firm," according to an explanation of the study written by Jonah Lehrer in the Wall Street Journal. Traders aren't trying to coordinate their trades, it just happens—it's human nature to make a similar decisions in sync with those in your friend circle.
The study suggests something incendiary—the genius of a good stock trader is not in how accurate they analyze, it's in how often they sync up with the crowd. So, if you don't know whether to buy or sell, find out what the big IM-ers are doing and do the same.
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SOURCE Wall Street Journal