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February 13, 2013

Twitter and Facebook influencing stock prices

New research links public sentiment on social media channels with the valuation of individual stocks.

By Tineka Smith

The study by Colt Technology services interviewed over 350 UK financial professionals.

Over 60% said that public opinion on social media sites played a role in stock prices.

While only 7% said that social media was a leading factor, 45% said it definitely had a role to play.

Hedge funds and proprietary trading houses are now able to scan social media data and analyse messages into a range of public mood states. An algorithmic or trading strategy is then used to placed trade orders, giving them an edge over competitors who use traditional forms of data.

"In a market where liquidity is highly valued and investors cautious, new sources of competitive advantage will always be welcome," Hugh Cumberland, Solution Manager at Colt Technology. "What’s important is working out how best to leverage the data mined from millions of social media messages to help trading firms cut through inertia and deliver much needed volume."

However, the research revealed that a third of respondents said the ability to respond fast enough to social media sentiment was a barrier. The volume of data from social media also created challenges for creating successful trading strategies.

"Data mined from millions of tweets and Facebook posts will only add to the increasingly large volumes of information flowing through a firm’s IT systems," said Cumberland. "With additional capacity and bandwidth required to store, access and manipulate the millions of messages, social media analysis will need to be underpinned by an appropriate IT infrastructure to ensure a consistent, fast and reliable flow of data into the heart of the trading environment."

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Over 40% of respondents said that they would struggle to respond quickly to the daily amount of data coming from social media channels.

"While I have no solid grounds to be for or against the use of social media for sentiment-based investment, the use of social media for additional investment strategies is certainly an interesting concept," said Dr. Daniel Buenza, Lecturer in management for the London School of Economics (LSE). "One approach could be based on trending topics, which is different from sentiment. Another could be on semantic analysis, which is not just analysing the positive or negative, but the actual content itself. However, I’m yet to see any companies adopt this approach yet."

The research suggests that confidence levels need to significantly improve before social media trading would become the status quo.



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