The capital market has always been at the forefront in adopting new technology mainly because effective technology deployment has a direct impact on the bottom line. Faster execution of trades, algorithmic trading and complex analytical tools are just a few instances where technology use has been critical to staying ahead of competition. We are now experiencing another innovative use of technology in this industry, the use of social media.
Where social media is used
Predicting stock prices: Research studies indicate a strong correlation between social mood and stock prices. Social mood is found to be a lead indicator of stock prices. The volume of data posted on a daily basis on social media is huge. Twitter alone has over 100 million tweets a day. A study published by Johan Bollen (Associate Professor Indiana University), Huina Mao (Indiana University) and Xiao-Jun Zeng (University of Manchester) looked at the correlation between collective moods of millions with Dow Jones Industrial Average (DJIA). The correlation between collective thoughts and moods of millions was found to provide an indication of stock market moves in the near future.
Another study conducted by a researcher at Pace University, in association with Famecount.com (which tracks brand popularity on social media) has looked at the link between social media popularity of key brands and their respective share prices — and found a statistically significant correlation. This study has demonstrated that the popularity of a brand on social media can be impact stock price.
Interestingly, this correlation is not just restricted to the academic world. London-based Derwent Capital has launched a £25 million hedge fund which will utilise the sentiment derived from real-time social media sentiment analysis. Penson Financial Services Inc has plans to provide both retail and institution brokers with quantitative trading signals that incorporate social media sentiment.
Social Media in retail trading: Individual traders are adopting social media in a big way. Unlike professional traders who do not want the market to know their positions and trading history, online retail traders actively share information. They use social networking to obtain ideas and tips.
Retail investors are using social media for trading in multiple asset classes.
Online FX trading Web sites such as currensee.com allow users to build communities to share and discuss trades. On this platform, retail forex traders around the world can share trades in real time. It allows you to build trading friends based on their profile. On similar lines, Zecco's Wall Street, which is a Facebook application, gives the users the ability to ‘like' a stock, and then track its latest developments. Users can also place orders directly from Facebook.
Stocktwits allows users to participate in a global community of investors to get information and ideas. Users can connect with investors and traders of similar profiles and follow them.
Prediction of stock prices based on the collective sentiment on social media is, however, still in its infancy. For it to take off, extraction and interpretation of data from social media has to be made more intelligent. Information available on social media is unstructured. As a result, intelligent filters have to be applied to extract the relevant feeds. Analysis of the social media feed also has to be context sensitive. This will be a key differentiator between stock price predictive models.
Location is another factor that has to be taken into account. Tweets from a user in Bhutan may not be used as a lead indicator of the sentiment to predict the DJIA. Also the demographic profile of the user needs to be considered while extracting the social media feeds.
The social media feed should also be used in conjunction with news feeds. For instance, commodity prices have an impact on the currency movements so news feed impacting the oil producing countries should be used in conjunction with the sentiment analysis of social media feeds from the region.
Predicting stock price based on social media popularity may work for brands in the public media.
However, brands which are less consumer facing may not demonstrate the same level of correlation.
Correlation of the popularity on social media with stock price needs to be studied across market conditions. ‘Fans' may cease to be fans in a bad market.
Indian context
While stock market participants in India may not be using social media with the intent of predicting stock price movements, social media is generating interest among market participants. The stock market regulator, SEBI for instance, has been concerned about the usage of social media to manipulate the market and in March 2011, issued a circular to market intermediaries asking for a code of conduct for their employees on publishing unauthenticated news about companies to manipulate the market. Broking houses have been directed to ensure that access to blogs, chat forums is restricted or put them under supervision or bar them completely. In addition the logs of such site usages have to be maintained as records. This does not augur well for platforms such as message boards, where stock trading tips are exchanged within the trading community.
Concerns from SEBI indicate that the usage of social media is going to find its way into this industry. Already we see an investor trading community being formed at stockezy.com an investing community, which connects stock market investors in India. Stockezy was launched in 2008 and now has 40,000 members.
Convergence of social media and capital markets is a promising area for research. With the right level of investments, the accuracy of output can be enhanced and confirmed. Use of social media by individual traders is only going to increase as it enhances information sharing. Social media disseminates information through viral propagation, which is of great value in the world of trading. In the near future, more retail brokers would be offering social media based trading platforms to their clients on which the clients can collaborate and trade effectively.
(The author is Director, Sapient Global Markets. Views expressed are personal)