Trading social signals

October 28, 2015 09:00 AM

The commodities market is under siege. With concerns about depressed economic growth in China, market sell-offs are catalyzing volatility across equities and commodities.  According to Wood Mackenzie Chief Economist Ed Rawle, we may be looking at a “black hole for commodity demand” if China’s declining economy creates a cyclical downturn in consumption. While volatility may be creating margin opportunities, traders still are facing slumping commodities revenues. According to a recent research report from consultancy Coalition, global commodities-related revenues at the top 10 investment banks have fallen by 25% in the first half of 2015. Additionally, for institutional traders, tighter regulatory and capital requirements have put downward pressure on commodities trading businesses.

What does all of this mean? Commodities traders need to take advantage of every potential trading opportunity presented by current market volatility in order to succeed in a constrained environment. More than ever, traders need the best intelligence available to make better and faster trading decisions.

Social media may hold the answer. A decade ago, the idea of using social media to make trading decisions would’ve been laughed at. Today, however, even the most sophisticated and conservative organizations are tapping into social intelligence. According to a recent report by the Bank of England, Twitter and other social platforms can provide important information for central banks by predicting market movements, indicating unemployment data ahead of time and giving signs of an impending bank run.

For commodities traders, social media event detection could be the difference between success and failure. Social event detection is the newest advancement in social technology, surfacing breaking news from credible sources that might impact the price of a commodity. As more and more news breaks on social media rather than on traditional media, traders need to act on the earliest mention of news, which may often be on Twitter rather than on CNBC.

Unlike the equities markets where earnings info might be delivered via an investor relations team, commodities prices can be influenced by a great corn harvest, for example, and so a tweet from a farmer could be incredibly influential in pricing. Tom Grisafi (@IndianaGrainCo), for example, is a commodities trader who tweets with 15 farmers on a regular basis to check on crop conditions (see Trading Pit, Oct. 2015). “They’re really good about getting back to me on how much rainfall they received, what crops they’re planting, how the weather is,” Grisafi was quoted in a recent article. 

Another example: in a recent Contix alert, at 9:31 am EDT on June 25, 2015, Central Farmers Co-op (@CentralFarmers) tweeted that grains were trading higher due to heavy rains in Illinois and Indiana. This important news broke on Twitter 10 minutes before the Financial Times first reported it at 9:41 am EDT (see “Time is money”).

Commodities traders need to be tapping into a pipeline of social media data as the market environment continues to evolve. With no end in sight for current volatility and continued regulatory constraints, traders need to leverage every potential alpha-generating opportunity that exists. New advancements in social media technology present unique opportunities for traders that could be the make-or-break factor in trading success or trading failure.

About the Author

Ryan Bailey is CEO and co-founder of Contix.