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TheStreet Open House

Stock Trading and Social Media: #Don'tBuytheHype

NEW YORK (TheStreet) -- Twitter, Facebook and other social media are increasingly influencing trading and investing, according to people who have something to sell you based on this notion.

Not so Mike Driscoll, a former Wall Street equities trader turned Adelphi University professor, who likens social media market commentary to anonymous chat rooms in the late 1990s where people tried to "pump and dump" obscure, thinly-traded stocks for a quick profit.

Institutional traders banned from using social media sites may actually be getting some work done

"I don't see how this in any different," Driscoll says of Twitter, StockTwits, and other offshoots.

One difference is the presence of online retail brokers like Zecco Trading, or 8 Securities, an outfit based in Hong Kong started by former E*Trade (ETFC) executives, that look to combine social media and trading.

Those companies share a common investor, Dutch financier Willem Willemstein, and allow users to see each others trades in real time.

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"If you say that you like Apple (AAPL), and you bought Apple, people can see that it's true because your trades are posted automatically and people can go in your portfolio and see what you've bought and what you've done with it," explains 8 Securities executive chairman Matthias Helleu. Zecco, meanwhile, allows you to place a trade directly from your Facebook page.

Another way traders can make good use of social media, according to proponents, is via technology that captures tweets and other online commentary about the stock market and uses it to measure investor sentiment on a given stock. Johan Bollen, a professor at Indiana University, argued in a 2010 research paper that Twitter can predict directional moves in the Dow Jones Industrial Average a week in advance with 86.7% accuracy.

Still, while Bollen sells his research to hedge funds, he says he and his colleagues aren't ready to give up their day jobs.

"That 86.7% figure is widely quoted in the media. What people forget is that that might be true, but you might lose all your money in the 13 or 15% where you're wrong," Bollen says.

It is one thing, and far from a sure thing, to take a massive amount of Twitter data and try to synthesize it into a gauge of overall market sentiment. It is another to argue that Twitter is bursting with savvy market players who are just dying to share their expertise with anyone who will listen.

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