In the two years that Gnip has been working with the financial industry, the state of social data and social media in the financial sector has changed dramatically. Here’s a look at where the industry stands and where we think it’ll go.
Social Media Moves Markets
Perhaps the highest profile event to involve social media in the financial sector this year was the Hash Crash.
On April 23, the AP Twitter account was hacked and tweeted that two explosions in the White House had injured Obama. The result? The Dow dropped more than 140 points within two minutes. It was an eye opener for many, on the power of social media to move markets. But what got lost in the coverage of this incident was that Twitter was part of the reason that the market rebounded so quickly. What Gnip has seen time and again is that rumors on Twitter are defeated just as quick as a rumor is started. Immediately after the initial Tweet, many others started to debunk the rumor giving live reports from the White House and setting the record straight.
The Hash Crash provided another, audible and clear reason for using social data if you are a participant in the financial markets. Our hedge fund and asset management customers have known this for sometime. If you weren’t following and analyzing social, you were most likely slower than others to understand what was happening in the market – in the dark.
SEC and Reporting on Social Media
Another big change to shape the industry was an official clarification in SEC policy on social media from the Securities and Exchange Commission allowing companies to announce key information on social media as long as investors knew that such channels would be used. As of today, more than 150 companies are using social media to report financial results or performance. Real-Estate Tech company Zillow, Nasdaq:Z ($Z) took this concept even further, opening their earnings Q&A up to questions from Twitter. Earnings calls have always been intended to provide color and transparency for all investors and potential investors of a publicly traded company, but the reality has been that they have been events attended and monitored almost exclusively by investment professionals. Opening up the announcement and especially the Q&A portion to Twitter isn’t as much a radical new move as it is a use of new technology to help re-align these events with their initial intent to give everyone access to information on the company to make investment decisions.
Social Data in the Markets
When Gnip first started looking at the ways the financial markets could use social data, we never would have guessed how fast the market would grow and how hungry people would be for data. In two years, we’ve seen large-scale growth of large hedge funds using Twitter social data as part of their trading strategies. Twitter provides a broad based stream that can answer questions about sentiment about companies, brands, ideas and rumors. Investors are finding value both through intelligent aggregation and data mining. When a merger rumor is breaking, you can find speculative deal values on Twitter before official numbers have been released. In addition to Twitter, financial institutions have found value in similar content from Stocktwits as well. Stocktwits has a curated community of financial investors who buy into sharing their thoughts online. Stocktwits has been especially valuable for traders and hedge funds who don’t want to sift through the noise on Twitter. If you search for Justin Bieber on StockTwits, you won’t find anything.
And earlier this year, Gnip signed a partnership with Estimize, a crowdsourced earnings estimates platform that provides open sourced financial estimates with incredible transparency, making it a valuable and unique set of social data. Estimize has a platform to capture and provide structure around the long explored concept of a whisper number. They’ve recently added Vinish Jha, a former Starmine Quant, to help add a layer of intelligent analytics on top of the open community, and to really work towards an open estimate that includes only the most accurate prognosticators.
The Adoption of Social Data in Trading Terminals
One of the oft passed around anecdotes at Gnip is how financial institutions talk about traders and analysts using their iPhones under the desk so they can keep an eye on Twitter. Due to regulation, most banks or brokerages don’t allow traders to post or use social media. To enable traders and analysts to access social media (but not to post) a number of banks and terminal providers have been adding social data to terminals - thus enabling users to at least look up conversations and research online. In the case of Bloomberg, for now they provide a curated feed, so it isn’t always the complete and full conversations.
New Uses – Risk Management
Over the next two years the acceptance of correlations between stock prices and social data will allow for deeper insights. The area I see making the most progress is in risk management. A good portion of making money in investing is figuring out how not to lose money. With the S&P on a 5 year growth run, it’s no secret that there is a risk of a pullback, the big question is when?
Social data allows for risk modeling that removes one of the inherent biases of price/volume based modeling. Price and volumes of a security or asset only move when investors are ready to take action. Social media volumes and sentiment move around thought and discussion. Given the hope that thought and discussion still generally precedes action in the strategy of most investors, there exists a huge opportunity to pick up on early, previously undetectable correlations between companies and concepts. A quick teaser example below shows normalized rolling 24 hour Twitter volumes for 2 related securities (LNKD and FB) and two unrelated securities (LNKD and IBM). In the next year I expect more companies to start looking at these types of correlations for risk management, both between securities and concepts like “government shutdown”.
So Where Are We Headed?
Many of the initial uses cases have been reading social media for actionable trade ideas. The growing number of firms trying to offer social media based signals shows the success in this area. The next 1-2 years will be about expansion in two directions: improvements in implementation/standardization and expansion of insights. Now that social data has made it through the sandbox phase for certain applications, the focus turns to integrating with existing processes and data sets. The most successful aggregators and indicators will partner with exchanges and traditional financial data vendors to help their data flow through to existing trading and research systems making the information more broadly accessible and cheaper to implement. On the raw data side, more tools will emerge to standardize linking data back to existing security/company identifiers and accepted industry and index classifications.
Using social data in the financial sector is fast becoming a must have, not a nice to have.