Shares of Twitter dropped from $51.21 at 3pm Eastern to $41.80 by 3:45pm. A drop of 18.38% The reason for the drop was based upon the earnings report released. Unfortunately for many people, the earnings were due to be released after the close of the market, and an error meant that they hit the Twitter Investor Relations page early.
Financial Intelligence Firm Selerity released the news of the results, and the stock traded based on that. It is testament to the power of getting news quickly, and also automating trading.
— Selerity (@Selerity) April 28, 2015
Efficient Market Hypothesis
There is an economic theory that markets are efficient, to varying levels. This is known as Efficient Market Hypothesis, developed by Professor Fama, and comes in 3 basic forms, weak, semi strong and strong.
Believes that markets are efficient, and that prices reflect all past public data. Technical Analysis will not offer any advantage.
Semi Strong Form
Believes that in addition to the weak form, all publicly available data is already reflected in the stock price. Fundamental Analysis will not offer any advantage.
Believes that all information, public and private is already reflected in the price, and having any insider information would offer no advantage.
As we can see from yesterday and $twtr there was private information (the earnings) that was not priced into the stock, and as such being able to react quickly as offered an edge to it. This is a good example to debunk the Strong Form.
What can investors do about errors like this? Automated stops can help protect against large swings like this, but often the price drop is so rapid that the sale price will be far below the stop, and it simply isn’t easy for the individual to keep pace with larger institutions. Hedge Funds were first exploring twitter and social media news as far back as 2010, although the most famous from those days, created by Derwent Capital Markets was liquidated in short order, as HedgeThink explains here.
Overall, it’s clear that the only solution for an individual is to be sufficiently diversified, so that a single move like that at Twitter does not cause catastrophic damage to your portfolio. I believe the best way to achieve this is to hold core investments in low cost ETFs and keep single stock speculation within manageable proportions.