Social Media & Research: Opportunities and Risks

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The FBI is reportedly monitoring Twitter and Facebook for insider trading violations.  The FBI views social media as a potential breeding ground for securities fraud.  At the same time, social media use by employees has become one of the top compliance concerns among SEC-registered investment advisers and academics continue to mine social media for improved stock performance.

According to Reuters, the FBI has agents monitoring social media websites for securities fraud violations.  “I will tell you technology will play a huge part, social media, Twitter.   Any kind of technology that is new and doesn’t exist today, if there is any way to exploit it, these individuals will exploit it,” said April Brooks, a special agent in charge of the New York field office of the Federal Bureau of Investigation.

Meanwhile, 80% of Registered Investment Advisers surveyed by the Investment Adviser Association (IAA) have adopted formal written policies concerning social networking.  54% of firms prohibit the use of personal social media sites for business purposes, and 52% report that their social media testing has increased since 2010.

As we reported earlier, the survey was conducted earlier this year by the Investment Adviser Association (IAA), ACA Compliance Group and Old Mutual Asset Management and incorporated responses from 555 compliance professionals from SEC-registered advisers.

Academics continue to search for a link between social media and stock price performance.  A recent study led by the University of California Riverside examined the relationship between Twitter posts and stock prices.

A team of computer engineers led by Professor Vagelis Hristidis found that stocks which receive a diverse set of Twitter posts discussing a variety of facets of a company tend to outperform.   However, if the Twitter discussion centers on a small number of news items or discussion topics about a stock, it underperforms.

Another report, authored by academics Johan Bollen, Huina Mao and Xiao-Jun Zeng, says the degree of “calmness” of the Twitterverse can predict – with nearly 88% accuracy – how the Dow Jones industrial average will move two to six days ahead of time.

We have reported previously on academic efforts to mine social media for economic or stock market insights.  We believe that ‘big data’ represents an exciting new frontier for investment research.  However, as the FBI action makes clear, with opportunity comes risk.  Social media is increasingly used as a dissemination vehicle for investment ideas, and, as such, will need to be monitored as part of firms’ compliance platforms.

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