Using the Wisdom of the Crowd to Democratize Markets

David Weidner at the Wall Street Journal: “For years investors have largely depended on three sources to distill the relentless onslaught of information about public companies: the companies themselves, Wall Street analysts and the media.
Each of these has their strengths, but they may have even bigger weaknesses. Companies spin. Analysts have conflicts of interest. The financial media is under deadline pressure and ill-equipped to act as a catch-all watchdog.
But in recent years, the tech whizzes out of Silicon Valley have been trying to democratize the markets. In 2010 I wrote about an effort called Moxy Vote, an online system for shareholders to cast ballots in proxy contests. Moxy Vote had some initial success but ran into regulatory trouble and failed to gain traction.
Some newer efforts are more promising, mostly because they depend on users, or some form of crowdsourcing, for their content. Crowdsourcing is when a need is turned over to a large group, usually an online community, rather than traditional paid employees or outside providers….
Estimize.com is one. It was founded in 2011 by former trader Leigh Drogan, but recently has undergone some significant expansion, adding a crowd-sourced prediction for mergers and acquisitions. Estimize also boasts a track record. It claims it beats Wall Street analysts 65.9% of the time during earnings season. Like SeekingAlpha, Estimize does, however, lean heavily on pros or semi-pros. Nearly 5,000 of its contributors are analysts.
Closer to the social networking world there’s scutify.com, a website and mobile app that aggregates what’s being said about individual stocks on social networks, blogs and other sources. It highlights trending stocks and links to chatter on social networks. (The site is owned by Cody Willard, a contributor to MarketWatch, which is owned by Dow Jones, the publisher of The Wall Street Journal.)
Perhaps the most intriguing startup is TwoMargins.com. The site allows investors, analysts, average Joes — anyone, really — to annotate company releases. In that way, Two Margins potentially can tap the power of the crowd to provide a fourth source for the marketplace.
Two Margins, a startup funded by Bloomberg L.P.’s venture capital fund, borrows annotation technology that’s already in use on other sites such as genius.com and scrible.com. Participants can sign in with their Twitter or Facebook accounts and post to those networks from the site. (Dow Jones competes with Bloomberg in the provision of news and financial data.)
At this moment, Two Margins isn’t a game changer. Founders Gniewko Lubecki and Akash Kapur said the site is in a pre-beta phase, which is to say it’s sort of up and running and being constantly tweaked.
Right now there’s nothing close to the critical mass needed for an exhaustive look at company filings. There’s just a handful of users and less than a dozen company releases and filings available.
Still, in the first moments after Twitter Inc.’s earnings were released Tuesday, Two Margins’ most loyal users began to scour the release. “Looks like Twitter is getting significantly better at monetizing users,” wrote a user named “George” who had annotated the revenue line from the company’s financial statement. Another user, “Scott Paster,” noted Twitter’s stock option grants to executives were nearly as high as its reported loss.
“The sum is greater than it’s parts when you pull together a community of users,” Mr. Kapur said. “Widening access to these documents is one goal. The other goal is broadening the pool of knowledge that’s brought to bear on these documents.”
In the end, this new wave of tech-driven services may never capture enough users to make it into the investing mainstream. They all struggle with uninformed and inaccurate content especially if they gain critical mass. Vetting is a problem.
For that reasons, it’s hard to predict whether these new entries will flourish or even survive. That’s not a bad thing. The march of technology will either improve on the idea or come up with a new one.
Ultimately, technology is making possible what hasn’t been. That is, free discussion, access and analysis of information. Some may see it as a threat to Wall Street, which has always charged for expert analysis. Really, though, these efforts are good for markets, which pride themselves on being fair and transparent.
It’s not just companies that should compete, but ideas too.”