Harnessing the investing power of social media chatter

Photo courtesy of Wendy on Flickr

Photo courtesy of Wendy on Flickr

Rob Swystun, Pristine Advisers

Just how much social media chatter (smatter, if you will) affects share price volatility is becoming clearer.

Colt Technology Services conducted a poll of 360 UK financial professionals and found that 63% of respondents (and keep in mind this includes people like brokers and heads of trading desks) believe the valuation of a stock is attributable to public sentiment expressed in the smatter online.

Only 7% of respondents said they thought smatter was a leading indicator, as outlined in a Finextra blog post about the survey, but just under half of respondents considered it to be a trailing indicator.

Harnessing the smatter

The perceived influence of smatter has prompted some heavyweight investors, including hedge funds and some of the big trading houses, to try and harness it with some kind of algorithm that will pluck out the information and give them a head start on a potentially hot investment over firms who rely on more traditional data.

However, there are a couple of rather large drawbacks to mining the smatter for information. One of those drawbacks is the inability to respond quickly enough to it. Nearly a third of the respondents in the Colt Technology survey said they didn’t think they’d be able to respond to smatter quickly enough to make it a viable source for stock information.

Tied to that is the mind-boggling volume of data. There’s just so much of it that it’s hard to sift through it all. Of the respondents to Colt Technology’s survey, 43% said they would find it difficult to respond quickly enough to the daily influx of information to garner successful trading strategies from it.

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

Tools

The Wall Street Journal’s Georgia Wells recently looked at three different firms who’ve made it their mission to monitor the smatter for hints about which way stocks are set to go.

Social Market Analytics LLC in Chicago has created an algorithm to scan tweets for words that indicate sentiment about a stock and then uses the data to score how the smatter around a particular stock changes. It then sends out email reports, alerts and a data feed.

But the company doesn’t monitor all tweets that mention a stock, it concentrates on market influencers, people like active traders who have a proven history of making good calls.

“On social media, it isn’t just what’s being said, it’s who’s saying it,” CEO Joe Gits says.

Market Prophit LLC, on the other hand, uses natural-language processing software to track tweets about individual stocks that include cashtags (such as $AAPL for Apple Computer). The firm assigns a sentiment score to each tweet to create a real-time graphic showing whether the tweets about the stock indicate an overall bullish or bearish sentiment.

The firm plans to add a new feature to its website that weights tweets from investors with a history of successful trading calls, Chief Executive Igor Gonta says, so the company will then be able to compare the sentiment of these traders to the overall smatter. The company’s website is currently in beta form and is free to try.

And, lastly, the software of MarketPsych analyzes social media, plus news sites to identify macro themes like fear and optimism about a stock. Managing Director Richard Peterson says investors can then use the data to compare short-term and long-term sentiment about a stock and help identify turning points in the market and gauge the market’s consensus around a particular stock.

MarketPsych’s website includes a dashboard with broad overviews of sentiment levels for entire classes of assets. It lists, for example, which sectors and assets incur the most fear or anger from investors, or where earnings expectations are the highest. The firm also offers a more expensive professional plan that includes charting and tools to show what has been driving particular stocks’ prices.

Ironically, for the immense amount of smatter out there, former investment banker Ilya Zheludev, who was one of the first academics to study social media’s potential as an investment tool, says that for many stocks, there isn’t enough smatter to provide investors with information to reliably predict the market … yet. But that should change as the amount of information on social media increases.

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2 responses to “Harnessing the investing power of social media chatter

  1. Pingback: Social media now seen as skill CEOs should have |·

  2. Pingback: News sentiment analysis tools still not yet ready to embrace smatter |·

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