Tweet. Like. Follow. Flag.
These are some of the newest terms in traders’ lexicons as social media has gone from just a fun pastime of online jokes and photo postings to integral part of execution strategy with data and charts. While social media remains a hotspot for compliance departments to contend with, just looking at Twitter one can see professional traders, news agencies, market pundits and others openly voice their opinions on the market, market structure and just about everything else. But has social media had a definitive impact on trading? Have traders replaced the traditional newswire or newspaper with tweets, Facebook posts or LinkedIn features?
Ian Domowitz, Vice Chairman, ITG told Traders Magazine that Twitter has changed the information used for trading by the retail community, as opposed to professional (e.g. hedge fund and institutional) trading). The phenomenon of ‘trump tweets’ is a singularity, and should not be confused with general information. The real point: Twitter is public information, and public information is not typically a source of excess returns.
“I don’t believe that public social media sites affect trading in any material fashion,” Domowitz said. “Once again, public information. There are Twitter aggregators (like Stocktwits and others) that provide a filtered version of general twitter traffic to eliminate noise relative to the type of news to be disseminated on the site. Perhaps useful to retail, but our own research on the FX market, for example, shows limited predictability, and no impact on general market structure related to trading.”
But one new entrant in this space, Pluribus Labs, an unstructured data analytics firm led by former Instinet COO Frank Freitas, sees things differently.
“Twitter has definitely enhanced the trading landscape,” said Wachi Bandara, Chief Research Officer at Pluribus Labs. “One could even make the argument that Twitter constitutes a new form of market data that traders must incorporate into their information gathering process if they want to understand all facets of information that potentially move stocks.”
Bandara explained that Twitter usage can be broken down into two distinct categories – event detection and systematic predictive information.
“On the event detection side, there have been several well-publicized examples of traders profiting from the early capture of market moving information. Our view is that Twitter is increasingly important from a systematic perspective as well,” Bandara said. “There is immense value in aggregating the opinions of thousands of traders. We have shown that the volume of messages alone has explanatory power over stock performance. Using a proprietary language engine, we can show that Twitter data can inform profitable trading strategies.”
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