Financial Social Media Coming of Age?

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Gnip, a data provider specializing in social media feeds, released a whitepaper saying that mining social media for financial market insights is three years behind branding analysis, and is reaching a tipping point.  Social media traffic relating to financial markets is growing exponentially.  Social media analysis is spreading from equity markets to foreign exchange, energy and commodities markets.  Gnip argues that financial analysis of social media is reaching a point of accelerating adoption equivalent to the earlier adoption of social media branding analysis.

Founded in 2008, Gnip provides data feeds of various social media sources.   Gnip was the first to distribute Twitter and Twitter archives and has added feeds of Foursquare, Word Press, Facebook and others.  Its primary client base utilizes its feeds for brand analysis, but sees growth in financial data mining of social media.

Growth in financial analysis

Early adopters of social data analytics in finance were a small set of hedge funds and high frequency traders.  In 2013, a few things happened to increase financial market interest in social media:

  • The SEC blessed social media outlets for corporate announcements in compliance with Regulation Fair Disclosure.
  • The Hash Crash in April took 140 points off the Dow in two minutes after the AP Twitter account was hacked and tweeted about explosions in the White House.
  • A tweet by Carl Icahn caused Apple’s stock price to add $12.5 billion in market value.

We also noted that a tweet by a Hedgeye analyst caused Kinder Morgan Inc (KMI) shares to drop 6 percent taking $4 billion off the company’s market capitalization.

Financial discussions on social media have grown over the past three years, in part thanks to the “Cashtag”.  Cashtagging is the convention of adding a “$TICKER(s)” tag to content to associate the discussion with tradable equities.  According to Gnip, in comparable periods from 2011 to 2014 cashtagged conversations on Twitter around Russell 1000 securities increased more than 550% reaching several million messages per quarter.  Use of cashtags has expanded beyond equities to FX, futures, and commodities.

A tipping point?

Gnip claims that financial analysis of social media is now entering the second stage of a product S-curve, the stage of rapid adoption.  It argues that adoption is about three years behind the use of social media data for branding analysis, which accelerated around 2010.

Gnip is seeing two primary use cases for financial analysis of social media.  One is to mine social media (mainly Twitter) for news.  Bloomberg and Thomson Reuters have added filtered data from Twitter and StockTwits to their platforms.  News oriented startups include Eagle Alpha, Hedge Chatter, Market Prophit and Finmaven.

The second use case is to apply analytics to social media to create scores, signals and other derived data from Twitter or other social media.  These companies include Social Market Analytics, Contix, Eagle Alpha, Market Prophit, Infinigon, TheySay, Knowsis, Dataminr, PsychSignal and mBlast.

Our take

Although Gnip has a clear incentive to talk its book, there is no question that the intersection of social media and finance is growing.   However, there are still some formidable barriers to be breached before social media becomes a mainstream financial markets vehicle.  One is regulatory.  Although the SEC condoned use of social media for company announcements, the use of social media for the distribution of sell-side stock research is still problematic, not least because of required disclosures.  More importantly most producers of sell-side research (the banks) strive to control and measure access to its research.

Which isn’t to say that social media won’t ultimately disrupt the current research business model.   Academic studies suggest that crowd-sourced models such as Seeking Alpha and SumZero are outperforming Street research.   Deutsche Bank’s Quantitative Research Group recently validated the use of Estimize’s crowd-sourced estimates data in quantitative research models.  However, it is difficult to disrupt a business model subsidized by client commissions totaling over $10 billion globally.

Difficult, but not impossible.  Financial analysis of social media will continue to grow, investors will increasingly mine big data, whether derived from social media or other sources, and crowd sourcing of financial analysis will increase.  The tipping point, however, is still ahead of us and has some obstacles to surmount.

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