Nerds on Wall Street: Math, Machines, and Wired Markets

10.1. Investing with Crowds

Unlike restaurant or shopping advice, collective stock recommendations on message boards and "share the love" investment sites are examples of situations where deceit can be profitable. Holders of long positions in a stock have a powerful incentive to drive up its price, and those with short positions have a powerful incentive to drive it down, irrespective of the actual merit of either position. The anonymity of the Internet and the ability to create multiple identities make this easy to do. As long as this looks like opinions being shared and does not cross over into outright fraud, the Securities and Exchange Commission (SEC) will not come knocking on an opinion sharer's door. Many Web denizens do cross the line into criminal manipulations (some of the most egregious examples are described in the next chapter), but the distinction between the illegal and the merely malicious can be fuzzy.

During the tech bubble, a company called iExchange opened for business with a huge burst of PR, including segments on the major network news programs. The company T-shirts, which seemed to be everywhere in its hometown of Pasadena, read "BUY SELL" on the front and "TELL" on the back. It raised over $30 million from some of the biggest names in venture capital, and had one of the slickest social web sites seen up to that time. The home page from that site, www.iexchange.com, on June 20, 2000, is shown in Figure 10.1.

The business model was that the first few tastes ...