Jumping on the Bandwagon Brings Rewards

"Uzzi and his Northwestern colleagues analyzed a year and a half of trades — more than a million transactions — made by 66 day traders at a single firm. Parsing the trading behavior down to a scale of seconds revealed sweet spots of synchronization —seconds to minutes when many traders were engaged in frenetic activity. On average the traders made money on 55 percent of their trades, but those who were in sync with their peers profited 60 percent of the time.

“I love the counterintuitive nature of the finding,” says complex-networks expert Albert-László Barabási of Northeastern University in Boston. “The dogma is that the successful investors are the Buffets — those who swim against the current. Yet this study shows that when it comes to day trading, going with the wave has real benefits.”

A peculiar aspect of the emergent intelligence is its lack of intentional coordination. There wasn’t a preestablished crowd for traders to glom onto, nor a leader to follow. The assessment suggests instead that instant messaging among traders helped couple their behavior. Instant messaging volume went up and down with trading volume, and the flow of instant messaging became less random as traders got more in sync, the researchers found."

Article here.