07.29.2013
By Terry Flanagan

Traders, Investors Eye Social Media

Trading and investing firms are increasingly turning to social media such as Twitter and Facebook for information on securities and markets. But there is wariness regarding the risks associated with leveraging information sources that are not subject to the same accuracy standards and quality controls as established news media.

“Social media has become a fire hose of data and for the most part an untapped resource. Yet there is no surrounding trust model to ensure confidence in the content’s validity and accuracy,” said Louis Lovas, director of solutions at OneMarketData. “Few are currently leveraging it as a source of alpha, but many are in the investigative mode. Technology, still nascent, has to play catch-up and prove itself before widespread use is possible.”

According to a recent survey of conducted by OneMarketData, 18.2% of responding market participants use information from social media in their trading strategies; 34.5% of respondents are at least considering doing do, while 47.3% of respondents indicated no interest.

At the same time, 56.4% of respondents said that social media presents opportunities to generate market-beating returns on a daily basis, and fully 85.5% of respondents said that social media is quicker to the punch when it comes to disseminating and analyzing breaking events.

Market participants who see value social media but don’t use it have one overarching concern: reliability. That concern came to the fore in the wake of the April 25 ‘hash crash’, when a tweet sent out by the Associated Press account falsely said bombs exploded at the White House and President Obama had been injured; stocks fell briefly before recovering.

Social media is a frontier compared with traditional media and there will be more abusive practices and dissemination of false information. But such instances can  also spark change and innovation to prevent further security breaches, Lovas noted, bolstering social media’s credibility.

“This is the motivation to harden the security around social media — that most assuredly will happen. In the meantime, the industry is wary of abuse creating false positives,” Lovas added. “This creates a significant barrier to adoption to use social media within trade logic and real-time risk. The first steps will be defensive, as firms use social media sentiment as a means to exit a position to prevent loss.”

“The current market climate of thinning margins has pushed the envelope — provoking firms to investigate non-traditional data sources such as news and social media for alpha,” Lovas continued. This will be “most likely as a complementary source of information correlated with market data analytics.”

 

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