January 31, 2013 11:16 am

Tweets are music to asset managers’ ears

The scale of social media activity means it is not just brokers and traders who can benefit

As Wall Street’s Gordon Gekko put it: “The most valuable commodity I know of is information.”

It’s a line that seems more appropriate than ever in today’s data-driven stock markets. The latest contribution to the data deluge is social media analysis. Brokers and other market participants now have the ability to monitor social activity across sites such as Twitter and Facebook, categorising these conversations by sentiment and feeding the data into algorithmic trading strategies.

Is this new? Not really. The heart of sentiment analysis is not a million miles away from what market participants have been doing for decades. It’s just that today, conversations are conducted online, and the public’s general mood can be aggregated and assessed by tools which predict the likely movement of prices.

Networks like Twitter have amplified the volume and frequency of price information. The existence of platforms such as StockTwits – a micro blogging service which pools data and sentiment – shows social media has a place capital markets. The company has already raised $8.6m in funding and has more than 200,000 registered members. It hopes to become the finance equivalent of Facebook but has also recently launched an investor relations version targeting investor relations professionals at Fortune 500 companies.

The scale of social media activity means it is not just brokers and traders who can benefit. The buyside can get in on the act too, with asset managers able to bypass brokers who stick to more traditional forms of data evaluation. Why would an asset manager spend time and money speaking to their broker for recommendations when they can either turn to another third party provider, or invest in the appropriate analysis tools to assess the information themselves?

Just like brokers, asset managers can analyse sentiment to help them achieve better price discovery and greater margins, a growing requirement in a deeply fragmented and volatile market.

Executing orders for clients to ensure activity reflects market price improvements, and providing new information on the likely execution of the trade is where Twitter analysis can make a huge difference. The increasing availability of social analytics tools is for many brokers a double-edged sword. Those that fail to adapt quickly to the new technology risk being isolated by the buyside.

As with all new technology, there can be a period in which product maturity doesn’t quite match the level of expectation. For example, Derwent Capital, the hedge fund which devised its entire strategy from sentiment analysis, was probably a little ahead of its time. Successful players will be those that use sentiment tools as part of a wider trading strategy rather than as the sole source of information.

Whatever its role in the trading cycle, the inclusion of social media monitoring will, like much of the capital markets activity today, require infrastructure support. In order for the data mined from millions of tweets to be valuable, it has to be easy to access and analyse, allowing users to isolate what is useful from the large volumes of noise.

Not difficult to manage but the relevant data storage and bandwidth is required to ensure a sudden spike created by a brand trending on Twitter during a crisis, or an ad going viral, does not exceed the available bandwidth or storage capacity.

For example, if a trader looks to sell short, the data need to be accessed and analysed as quickly as possible. However, if a trader were to adopt a longer-term investment strategy, he would need to be able to analyse larger amounts of data over an extended period of time. Sell-side participants who react quickly to adopt this approach will be positioning themselves as knowledgeable advisers and relationship managers to the buyside, rather than as the commission-driven sales agents of the past.

Social media analytics offers a competitive advantage for those brokers who not only understand its possibilities, but who also appreciate its limitations. The winners will be those who use it to innovate and ultimately add value to the buyside. Those who don’t act quickly risk erosion of a valuable relationship.

Hugh Cumberland is senior financial services consultant at Colt, an IT services provider

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