X marks the spot
Is social media heading from aggregation to fragmentation just like financial markets?
The growth of electronic platforms and algorithmic trading increased trading volumes and reduced bid-ask spreads across financial markets. But did market liquidity improve?
Try to execute a large block of shares or bonds and you will find out!
Similarly, so much of the content explosion on social media is just recycling. It could be a big social media account copying someone else’s tweets or just recycling content from LinkedIn to X to Instagram or the other way around. There has been an explosion of content but how much of this is really “new content.”
Exchanges migrated from the trading floors or pits made famous in one of my favourite movies the 1983 classic “Trading Places” to screens, software, electronic pipes, and “servers” in data centres far away from city centres. But technology, regulation, and consumer behaviour have since meant the initial increased centralization of financial market structure has given way to fragmentation.
Why did fragmentation of financial market structure take place and why could the same happen in social media? There were five primary reasons:
New formats became technologically possible,
Toxic flow on existing platforms,
Volumes and users are not the same as market depth,
Tailored pricing and service,
The offline world could only be digitized through new protocols.
New formats became technologically possible
When electronic trading emerged, there were not only exchanges but exchange-like central marketplaces known as central limit order books (CLOBs) in markets that don’t trade on exchanges like US Treasuries and foreign exchange. The cost of technology came down massively allowing space for competing platforms using the same format (CLOBs) or new formats. In markets that are less liquid a format called Request for Quote (RFQ), where a client would request a certain market maker bank to offer a price for a certain quantity of a stock or bond or derivatives emerged.
One of the major technology shifts was that RFQ which initially had been mimicking manual phone trading started to build out functionality that gave clients many of the advantages of the central marketplace (CLOBs). What do I mean by that? Here are a few evolutions:
RFQ to many - rather than just RFQ one liquidity provider at a time RFQ electronic platforms started to allow you to reach out to multiple liquidity providers at the same time,
Hidden orders - RFQ platforms started to allow you to show one part of your order and hide the rest to limit market impact,
Streaming prices - RFQ gave way to RFS (Request-for-streaming), or continuous streaming so in more liquid markets you didn’t have to send in ad-hoc requests but could ask for prices to be streamed to you by liquidity providers all day.
Anonymous segregated liquidity - one of the advantages of CLOBs is they are anonymous, so everyone receives the same price, and no one knows who that is from before the trade. One of the ways to get the benefits of both worlds is to join a liquidity provider’s approved list for their streams but for them not to know exactly who you are on any given trade.
I could go on and on but rather than digress let’s bring it back to social media.
Since its launch, Substack has been sold as a legacy media killer but here’s the thing - I read the FT, Bloomberg, and the WSJ just as much as ever. Could Substack and Substack forums be a competitor to X for content?
LinkedIn is better than ever for distributing content and…lots and lots of grandstanding but does anyone find a job on LinkedIn, which after all was the original purpose?
Even dating giants Tinder and Bumble are struggling with people increasingly swiping left. They must be looking enviously at the revenue growth and profitability of OnlyFans!
Bluesky will never replace X but maybe the future is carrying our “lists of friends and followers” from one platform to another in a more portable fashion. In financial markets, we do this through aggregators, which aggregate prices from across a plethora of platforms.
One of the biggest trends in financial market structure has not just been new electronic trading platforms but the internalization of flows by market makers that their cross trades in-house profiting from the whole bid-ask spread. Better data, technology, and concentration of flows have facilitated this.
Does more social media move offline into private forums?
For a long time, one of the strongest markets for X was the VC and tech community but today many of the most valuable conversations in tech are no longer happening there but are in WhatsApp chat groups.
Toxic flow on existing platforms
People have been distorting financial markets for centuries. A few years ago, I worked for a Bank of England-backed industry consortium called the Financial Markets Standards Board and my colleagues published “Behavioural Cluster Analysis - Misconduct in Financial Markets” which looked at 300 cases of market abuse in 26 jurisdictions going back hundreds of years. The analysis found that human nature hadn’t changed, and the same sort of market abuse was occurring throughout history and could be fitted into seven categories: 1) Price Manipulation such as spoofing, ramping, and squeezes, 2) Circular and wash trades, 3) Collusion and Information sharing, 4) Inside information, 5) Reference Price Influence, 6) Improper Order Handling like front running clients, and 7) Misleading Customers.
The thing is that the amount, speed, and intensity with which much of this can occur has increased. One area is “spoofing” where a trader moves the price of a financial instrument up or down by placing a large buy or sell order with no intention of executing it, hence creating a mirage of market interest. Once the price has moved the trader cancels the original order and places a new one. Electronic exchanges and CLOBs saw a massive spike in this kind of behaviour. JP Morgan received a huge $920m fine in 2020 for spoofing on its metals and treasuries trading desks between 2008 and 2016. Spoofing can be industrialized using algorithms.
Social media face the same pressures of toxic flow. Nowhere is this more prevalent than in the artist formerly known as Twitter. How many anonymous accounts on X are just people with regular jobs who do not want their colleagues watching over their shoulders versus bots, click farms, fake accounts, and trolls? AI will only increase the amount of copying and faking.
What about online search where the US government is looking into Google’s dominant position? Will OpenAI dominate the Generative AI era or is the lack of the same network effects and the deep funding going to competitors going to lead to fragmentation in search? One of the problems with Google as our window into the Internet is that the quality of content that it provides in searches has deteriorated massively.
Volumes and users are not the same as market depth
Most trading volumes on leading CLOBs come from high-frequency trading (HFT) firms that don’t take significant balance sheet risk and even banks are increasingly in the game of recycling liquidity from one platform to another. This is before we add quantitative hedge funds that look for price signals rather than underlying fundamentals or passive money.
Social media has meant that content is increasing in volume, which exhausts our attention, and our urge for 'newness' causes us to collectively switch between topics more rapidly.” A 2019 study Accelerating dynamics of collective attention | Nature Communications found that top trending topics on Twitter (now X) had steeper and more frequent peaks; a hashtag only stayed in the global daily top 50 hashtags on the platform for 11.9 hours in 2016 vs. 17.5 hours in 2013 but received much greater attention within that shorter time. I am pretty sure this trend has accelerated further in recent years.
Social media platforms like Facebook and X are reporting robust user numbers but then again, exchanges and CLOBs saw increasing trading volumes when they were inundated with spoofing and recycling of liquidity.
Near-term events can also create noise to overall user or volume numbers. Just like market participants need to offset risk on the primary exchange at times of huge macroeconomic volatility, users may flock back to an X at a time of huge geopolitical events but behind the scenes, the value proposition and ecosystem started to weaken.
Tailored pricing and service
In financial markets, one of the reasons exchange-like platforms didn’t suit all products is that as a liquidity provider with a finite amount of capital you want to use that to serve your clients. If you have a hedge fund from which you make a ton of money by providing financing, you will want to offer them a better price than another client. Similarly, a corporate client may value their lending and transaction banking relationship across dozens of countries and currencies and hence be happy to give the same bank most of their FX trading business.
If you have been away this summer with less social media and more book reading on the beach it becomes obvious that the high-frequency content of the former is no substitute for the latter. It reminds me of Sam Bankman Fried’s “I would never read a book…I’m very skeptical of books. I don’t want to say no book is ever worth reading, but I actually do believe something pretty close to that,” explains SBF. “I think, if you wrote a book, you fucked up, and it should have been a six-paragraph blog post.”
The thing is social media information is usually like getting a price from an HFT in a liquid CLOB in small ticket size while a book is like getting a block trade filled by a major dealer bank in a less frequently traded bond!!!
For an individual content creator without the megaphone of being on the front page of the Financial Times or Wall Street Journal website, social media is great for distributing blogs. However, the relentless campaign by social media sites to suppress links to external websites has underpinned a massive reduction in referrals from social media sites. There is of course some element of brand-building halo effect, but if a chart tells the story this one from Axios does just that on the increasing irrelevance of social media as a source of direct flow to news sites.
The preference of both social media algorithms and high-frequency users of social media for sensationalist content makes platforms like X more suited to Russell Crowe as Gladiator in the Colosseum!
The offline world could only be digitized through new protocols
It was new protocols, products, and ways of trading that led to the last round of digitization of financial markets. Bond ETFs were heavily criticized given the liquidity mismatch between them and the less frequently traded underlying corporate bonds but what we saw in the end was the tail wagging the dog. ETF liquidity underpinned credit markets, portfolio trading in baskets of bonds, breaking up block trades into smaller ticket sizes, and further electronic trading in the last major manual trading world – corporate bonds. It also led to a new breed of market maker – part electronic and part manual, part HFT and part bank-like in terms of balance sheet commitment - firms like Jane Street.
I was a late mover onto platforms like X and only really joined as my former colleagues told me “That is where the media hang out”. Go down to the pub with your old university friends or go to a family gathering and you will find very few are on platforms like X – that is at least my experience. Even if they were interested when social media was new and novel, this no longer appears to be the case. As for my kids, as they grow up I very much doubt Facebook or X will be where they hang out! What will be the next big thing that can get these people into the social media world if anything? Andreessen Horowitz thought it would be Clubhouse, a new type of audio chatroom but that flopped big time.
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