Social Media & Markets

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The key role that Twitter played in breaking the news about police abuses in Ferguson, Missouri highlights the growing importance of social media.  Big data, including social media resources like Twitter, will be as trans-formative for investment research as it is for news organizations, albeit in different ways.

Social media & investment research

It is fashionable to be a social media skeptic. It is easy to discount social media because of it noise, its amateurism and its profound banality.  The technology is still in its adolescence, and, like most adolescents, is ungainly, awkward and painful.

The full power of social media is still ahead of us, but already it is an input of growing importance for investment research.  A white paper by Gnip, a social media data feed provider recently acquired by Twitter for $134 million, documented the growing use of social media for financial analysis.

Gnip saw two 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.

However, there is a third use case, which is the distribution of research.  As one example, we have 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.  Ongoing discussions of KMI now regularly reference Hedgeye.

There are regulatory and compliance impediments to social media as a research distribution channel, but the brute reality is that social media is the primary communication vehicle for anyone under the age of 35 years.  Demographics will ultimately triumph over any obstacles.

Buy side use of social media

A white paper from Eagle Alpha, a Dublin-based research firm which mines social media, documented the growing use of social media and other web data by investors to conduct macro and equity analysis.   Bridgewater uses social media data, real-time internet price data and search engine data for real-time economic modelling. Other examples cited were Artemis and Mediolanum Asset Management.

Our take

Many of the buy-side firms we work with are cautious about social media as a source of investment research, but are keeping an open mind.  As social media continues to grow, so does its power as a predictive device.  Tools to filter and clean the data are also growing, improving the quality and frequency of investment signals.

Investors are having no such hesitation about big data generally, which encompasses a broader array of inputs than social media alone.  Big data incorporates all web based data, data generated by sensors such as satellites or traffic monitoring relays, phone data, credit card and other transaction data, among others.  Like social media, much of this data is still new, raw and unprocessed.  However, investors see tremendous value in being in the vanguard of mining big data for investment insights not yet reflected in market prices.

Technology will ultimately have a deeper impact on investment research than regulatory reform, even reform as far-reaching as being contemplated by European regulators.  We are still in the early stages of the transformation, but as stories like Ferguson point out, the change is inexorable.

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  1. “Demographics will ultimately triumph over any obstacles”. SPOT ON – try selling a research .pdf report to someone under 35 years of age. Within the Research industry, while in the early stages and having more questions than answers, exploiting the use of Social Media for research content packaging and delivery, is a front and center topic within our Technology Working Group discussions in RIXML.org. The key drivers for these discussions remain:

    > Tactical delivery of unbundled research “components” to buy-side PMs, Analysts and Traders
    > Research delivery to the “workstations of choice” – Smartphones, Tablets, et al
    > Increased regulatory scrutiny around buy-side commission use heightens the need for “new world order” competitive research packaging(Tweets, Components, et al), in order to drive the value/payment discussion

    The impact of Social Media and the potential for Big Data will indeed have lasting impact on Research delivery strategies going forward.

    Jack Roehrig
    Executive Director
    RIXML.org

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