02.21.2013
By Terry Flanagan

Twitter-Based Trading Strategies Leaving Traditional Investors Trailing

Traditional institutional investors are being warned that they are being left behind by more technologically-savvy traders who are using the latest tools—such as Twitter-based strategies—to predict the likely future movement of stock prices.

Analyzing the vast amount of data produced by social media sites such as Twitter and Facebook to assess market sentiment is beginning to take off in the finance world.

Oli Freeling-Wilkinson, chief executive, Knowsis

Oli Freeling-Wilkinson, chief executive, Knowsis

“Our own statistical significance tests suggest that social media does have an affect on asset prices,” said Oli Freeling-Wilkinson, chief executive of Knowsis, a U.K.-based technology start-up which mines every tweet that is produced on Twitter. From this, it offers firms a data feed service that provides real-time analysis of market conditions, asset classes and specific securities.

“Whether you use it to enhance existing strategies or bulk up your risk management process depends on the individual but it can add value. And the fact is that today, like it or hate it, social media is here to stay and many traders—especially in institutions—are missing out on the biggest shift in information flow for a generation.

“It is worrying for an industry supposedly on the cutting edge of the information curve.”

And a recent survey by IT services provider Colt, who interviewed 360 U.K. financial services professionals including brokers and heads of trading desks, found that nearly two-thirds of respondents believed that the valuation of individual stocks can be directly linked to public sentiment contained in social media channels.

Hedge funds and proprietary trading houses are at the forefront of using this new technology and once they have gleaned useful trading information from Twitter data they are quick to use high-frequency trading strategies to place orders, enabling them to potentially steal a march on their competitors who trade using more traditional forms of data.

“In a market where liquidity is highly valued and investors cautious, new sources of competitive advantage will always be welcome,” said Hugh Cumberland, solutions manager, payment and settlement services at Colt.

“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, respondents to the survey did highlight some concerns over sentiment-based trading. Nearly a third of respondents said the ability to respond fast enough to social media sentiment was a barrier to adoption, while just under half thought that the sheer volume of data produced from social media sites and the ability to understand this information was also a major challenge to creating a successful trading strategy based around social media data.

“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.”

NYSE Technologies, the technology arm of exchange operator NYSE Euronext, has also recently teamed up with Social Market Analytics (SMA), a quantitative analytics firm, to provide its customers with SMA’s social media monitoring engine.

“Everyone is monitoring what is being said on Twitter now,” said Tom Watson, vice-president, global market data at NYSE Technologies. “SMA offers firms the right tool for the job with data that consists of clear, quantified, actionable intelligence on social media sentiment.

“We believe this will change the way the financial sector thinks about social media. For the first time, trading firms, brokers, asset managers and non-financials in every sector will have a measurable way to track the sentiment of the social media stream of consciousness.”

And in the commodity derivatives space, Interactive Data, a provider of financial market data and trading platforms, has also added social media functionality to its recent upgrade of its FutureSource workstation, which supports traders, brokers and analysts in their investment and trading decisions.

“There is an increasing amount of information and discussion on social media around commodities—for example, people publishing a price via a traditional channel and also pushing that out via their Twitter feed and the subsequent reaction to that price,” said Tom Mallon, global director, energy and commodities for Interactive Data.

“So it has become another source of information to understand what could be influencing the markets. As a result, we now provide a service that provides topical and trending news sourced from the internet and social media, so in addition to the real-time breaking news you have the ability to see what is topical and what is trending in the market.”

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