Does Social Media Impact Financial Markets?

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Commentary on social media outlets has reached peak levels. This year marks the seventh anniversary of Twitter, and tweet volume now exceeds 400 million messages per day. Social media offers faster news delivery than traditional outlets, and it's sprinkled with opinions, commentary, and perspectives on business activity and political events.

One glaring example of the sentiment found in social media was the public outrage over Rolling Stone's now infamous choice of accused Boston bomber Dzhokhar Tsarnaev for a cover photo. If Wenner Media, the publisher of Rolling Stone magazine, was a publicly traded company their stock price would have plummeted following the social media berating heaped upon them. Who knows, it might have been known as the Bash Crash.

Social Media has challenged traditional publications as the future of information dissemination. The information flow is not directly targeted at reporting a news story in the classic sense, but artistic license to portray an emotion, the global psyche from the voices of millions.

Leveraging Twitter or other social media sources for economic and company information to gain actionable insight has begun to accelerate. The idea of trading based on non-traditional information is not new, but using Twitter or other social media sources of economic and business information has piqued beyond mere curiosity. There were a few pioneers who made a bold attempt to filter and trade on social media sentiment, yet only the unsuccessful make the headlines. The market impact following a fake tweet from a malicious hack into the Associated Press (AP) Twitter account bears witness to the increasing influence of social media on financial markets, providing the evidence that it is more than chatter about nothing.

Just how strongly social media impacts the financial markets is still unknown. The unabashed commentary suggests automated trading ran wild following the Hash Crash, causing the 145 point decline in the Dow that same day. Such accusations are wild speculation at best, unfounded by empirical evidence. It is just as likely that the human emotional response to the malicious act notoriously described in the fake Tweet caused the brief market plunge. Yet it is decidedly difficult to know.

Who better to answer these engaging questions than the market participants themselves, those actively seeking to discover and exploit new market inefficiencies. To that end, OneMarketData decided to solicit input from industry participants on their use of social media for trading and investment decision making. We are in the data management and analytics business for quantitative finance, so we have a vested interest in understanding how social media fits into the fold. We conducted a question and answer survey and have compiled the resulting statistics into the collective wisdom from participants across the global financial centers. The report looks to answer the question, "Is Social Media a Disruptive Force in Financial Markets?" You can download the survey report here.

Social media, especially Twitter, transcends the old news agency reporting model. It renders artistic license to portray individual opinions, perspectives and commentary on events across the globe. It is a ‘new frontier' and we are on the cusp, the tip of the iceberg of increasing our understanding of the human state of mind on a more global scale, yet at an intimate level. The yet-to-be-answered question is whether this will translate into actionable business insight.

Combining or correlating social media with traditional market data analytics and quantitative techniques creates enormous potential in understanding the dynamic nature of what makes markets behave, and is a huge step towards that elusive holy grail of accurate predictive modeling. At this point, the new frontier of social media is just a set of raw materials waiting to be assembled, yet the possibilities are intriguing.


Louis Lovas is Director of Solutions at OneMarketData.

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