Trading on social media

October 14, 2015 04:00 PM

On April 28, 2015, the unthinkable happened. Twitter’s earnings announcement was leaked to the general public – on Twitter itself. On the news that Twitter’s first quarter earnings had fallen short of expectations, the stock price plummeted 18% (see “Payback is…”). Aside from the incredible irony, this event is an example of the inextricable relationship between social media and trading. The trading environment is one where more and more news breaks over social media rather than traditional sources, moving markets well before the news airs on major news outlets. Given this new dynamic, are traders wielding social media as a valuable intelligence tool? More than ever. 

Until recently, social media was considered an unreliable, and even scorn-worthy source of information among many traders. Firewalls prevented traders from using social media in any capacity, whether personal or professional. Most brave ventures trying to break into the social media and trading sphere were focused on the inexact science of sentiment analysis — a difficult approach for traders to gauge how and why to trade according to the expression of emotion in social content. The rise and fall of Derwent Capital, the first “Twitter” hedge fund trading on social sentiment seemed to validate the skeptics.

The tide is turning, however. As social content proliferates exponentially and more news breaks on Twitter, more market-moving events are now being reported via social media, sometimes 30 minutes to an hour before being reported on traditional outlets. The Twitter earnings news broke on Twitter nearly 14 minutes before being widely reported. For those traders who use social media intelligence to identify trading events, an extra 15 minutes could capture a significant portion of a 15%-20% price movement in an equity – a huge spread in today’s paper-thin margin environment.

More traders now recognize that the most valuable use for social data is breaking news event detection. Rather than focusing on social sentiment analysis, traders should be using available tools and platforms for event surveillance so that they can trade as news happens. Given that many market opportunities are now captured in milliseconds, traders cannot afford to miss valuable seconds, let alone minutes, of opportunity. 

Given the unambiguous value of early breaking news from social media, it’s time to embrace social media as the extremely valuable data set it is. However, traders need to make sure they are doing the following when it comes to mining social:

  • Work with a platform that provides reliable credibility assessment: Not all Tweets are created equal. It’s important that traders use a product that accurately assesses the credibility of sources and news reports on Twitter before making any sort of trading decision.
  • Don’t just use lists: It’s not enough simply to create a list of Twitter sources as thousands of other traders have. Work with a provider who is algorithmically analyzing all potential sources on social media and surfacing differentiated news alerts that will provide alpha generation opportunities.
  • Know the difference between event detection and sentiment analysis: Event detection focuses on breaking news to provide clear actionable trading ideas. Sentiment analysis examines the positive or negative feeling toward a particular asset. There are valid uses for both but it’s important to understand the difference. There is more value to be gained from event detection where traders can clearly and quickly act on breaking news.

Using social media in trading is no longer a quirky science experiment – it’s a necessity. Traders, both retail and institutional, need to include social data sets for both discovery and analysis of trading ideas. Social media intelligence can provide the make or break difference for traders in generating much-needed alpha.

About the Author

Ryan Bailey is CEO and co-founder of Contix.