The rise of financial blogs

Joe Hagan of New York magazine writes about how financial blogs have become more powerful in influencing the markets and what we think about them, particularly the Zero Hedge blog run by a 30-year-old Bulgarian immigrant banned from working in the brokerage business for insider trading.

Hagan writes, “Financial blogs grew out of the message boards launched by Yahoo! Finance in the late nineties, which were primarily a forum for day traders to argue investment ideas and vent little-guy frustrations about the Wall Street power structure.

“The first financial blogger, according to Barry Ritholtz of the Big Picture, was Todd Harrison, the head trader for the hedge fund run by CNBC talking head Jim Cramer (also a New York Magazine contributing editor) in the early aughts. Harrison, who wrote a daily market column for Cramer’s TheStreet.com, ‘would crank out these little notes intraday,’ recalls Ritholtz. It was a real-time trader with real assets under management discussing trading flow.’

“In the years that followed, blogs proliferated. They were mostly side projects, updated sporadically. Ritholtz, who started the Big Picture in 2003, was a market strategist who zeroed in on flaws in the government’s inflation data. Calculated Risk was started by a retired businessman in Southern California who took an obsessive interest in exotic mortgages and saw the housing collapse years in advance. Naked Capitalism, which features the work of a small gang of contributors, is overseen by a former Goldman Sachs and McKinsey executive who goes by the pseudonym Yves Smith.

“Early on, the readers of these blogs seemed to be a relatively small and disparate group—a smattering of day traders, academics, and people who worked in and around the edges of the financial industry. They were ‘gold bugs’ and ‘dollar bears’ united by their hostility to Wall Street and their conviction that the U.S. economy was heading off a cliff. When Bear Stearns blew up, the bearish view was validated and these blogs gained credibility with a larger audience. Amid the chaos on Wall Street, they found themselves with much greater influence than they’d ever imagined possible.”

Read more here.