Tracking Traders' Understanding of the Market Using e-Communication Data

TL;DR

This study analyzes traders' e-communications to understand how collective insights reflect market conditions and predict trading performance, revealing that communication patterns correlate with market volatility and traders' understanding.

Contribution

Introduces a novel method to analyze bundles of words in traders' messages, linking communication patterns to market understanding and performance over 40 months.

Findings

Word bundles indicate traders' understanding of same day and next day market events.

Communication dominance shifts with market volatility levels.

Stronger focus on relevant events correlates with higher trading performance.

Abstract

Tracking the volume of keywords in Internet searches, message boards, or Tweets has provided an alternative for following or predicting associations between popular interest or disease incidences. Here, we extend that research by examining the role of e-communications among day traders and their collective understanding of the market. Our study introduces a general method that focuses on bundles of words that behave differently from daily communication routines, and uses original data covering the content of instant messages among all day traders at a trading firm over a 40-month period. Analyses show that two word bundles convey traders' understanding of same day market events and potential next day market events. We find that when market volatility is high, traders' communications are dominated by same day events, and when volatility is low, communications are dominated by next day events. We show that the stronger the traders' attention to either same day or next day events, the higher their collective trading performance. We conclude that e-communication among traders is a product of mass collaboration over diverse viewpoints that embodies unique information about their weak or strong understanding of the market.