04.24.2013
By Terry Flanagan

Social Media Evolves

For institutional traders and investors, social media can be seen as in-between stages of development. It has evolved from the mere curiosity it was just a few short years ago, but it has yet to firmly attain the holy grail of reliably helping to make better investment decisions.

The uses and derivations of twitter and other social-media outlets are changing rapidly.

Derivatives market consultant Diane Saucier, a former division head for Trading Technologies, moderated panels on social media in financial services at the FIA Expo in Chicago in October 2012 and in New York earlier this month. “I was surprised at how much has changed in just six months,” Saucier told Markets Media. “A lot of people were concerned with compliance aspects.”

Most pressing is the demand for ability to integrate social media calculations into reliable and actionable trading intelligence.

Specifically, market practitioners on the FIA panels said one of the biggest inquiries of buy-side firms is how direct the correlation is between sentiment on social media and future price movements.  Traders are testing how it can be put into algorithms; StockTwits is seeing more volume on Twitter sourced to financial market participants, and this can be measured and analyzed.

Though buy-side firms are not open to exposing their processes and intelligence, through Application Programming Interface (API) access, others in the industry know what kinds of data are being looked at – just not what they’re doing with it. As far as authorized communicators, most have only certain people who can tweet on behalf of the firm, and they have a host of compliance officers to validate what is going out, Saucier said.

In terms of compliance and monitoring, platforms are making it easier to use StockTwits and similar sources to monitor social media from an investor-relations perspective – i.e. what people are saying about one’s company, competitors, and sector. This facet of technology has barely gotten off the ground, according to some industry observers.

Bloomberg recently announced it would be the first financial information platform to integrate real-time Twitter feeds into investors’ data workflows.

For market participants, using social media as a source of actionable information is high-risk as well as high-reward. On April 23, traders who sold stocks on the Associated Press tweet about explosions at the White House were burned when the tweet proved to be the result of a hack and the market almost immediately rebounded.

Saucier recounted that not long ago, a hedge fund was started with the idea that they could trade entirely off Twitter sentiment. The venture failed, but the group morphed into a technology firm, underscoring that social media information is another input to a more complex strategy.

Some IT challenges include controlling use of social media by investors and employees as people are expressly prohibited from public dissemination using company technologies but they bring their own devices to work. Conference panelists said this is a cutting-edge area in institutionalized social media.  While platforms are becoming more sophisticated, control of who’s using social media is still in the domain of other corporate communications policies and controls.

There is more to come. Said Saucier, “every new platform model changes the game” for social media as a business tool.

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