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Trusted Analytics Biggest Obstacle in Social Media Adoption

Understanding the influences of social media on the marketplace and the barriers to adopting this alpha-generating strategy can guide the next wave of financial tech innovation.

OneMarketData released a survey on how the financial market uses and trusts social media technology.

Spoiler Alert: They don't.

This survey comes of the tails of the April 13 AP Twitter hack, in which a 70-character tweet falsely claimed President Obama was injured in an explosion, resulting in an immediate market crash. The tweet was found false and the market rebounded and carried on. But this "hashcrash" drew attention to the many ways traders are using algorithmic trading with social media sentiment to gain alpha, and to the glaring weaknesses of this strategy.

How Has Social Media Changed?

In a phone interview with Louie Lovas, director of solutions at OneMarketData, he explains the 50 global market professionals and academic researchers who were surveyed overwhelmingly agree social media can help achieve alpha, especially for equity traders, but are very skeptical of using it.

Even the firms that currently pull data from social media sites, mainly Twitter, are unsure of how to apply the information in fear of falling for another scam. Many other equity traders are interested in using social media, but are waiting on the sidelines for the technology that track it to improve.

[For more on Social Media read: Social Media Hacks, Will We Fall For the Same Tricks Again?]

Remembering the AP "hashcrash" 14.3% of those surveyed said it was an isolated event unlikely to reoccur. They are a minority compared to the 69% who said it is likely reoccur, and half of those skeptics said they will be adjusting their trading/investing strategy to accommodate the likelihood.

Pushing for Better

"Over 35% said that right now there's no way to validate the data. But that will change over time," said Lovas. "You have to remember that social media has only been around for a little over 10 years, and only in the last 2-3 years has that broad use for consumption kicked in. We're there, but we haven't kept pace with the analytical technology to make sense of it. We're going to see big changes in this area in the next months and years.”

According to the OneMarketData press release, "Of the market participants surveyed, more than half said social media provides opportunities to capture alpha on a daily basis. While only 18 percent of respondents say they are using social media data today, another 35 percent said they are currently researching how to incorporate social media into their trading and investment strategies.”

Value versus Trust

Survey Question #2: Do you believe that social media can offer faster information dissemination and analysis for breaking events than traditional media? Answer: 85.5% Yes, 14.5% No.

This is a bit of a surprise. Traditional news agencies have put a lot of effort behind creating credible sentiment enhanced machine-readable news, which can be easily digested by algorithmic trading strategies. Regardless of this effort, social is now considered a faster and more valuable information delivery system.

"Overall, even though we see an overwhelming response to Question 2, this is a huge tidal wave to digest and consume," notes Lovas. If you look at Question 18 (What do you see as the biggest obstacle towards integrating social media with trading and investment strategies?) this is the other side of the coin. 61% responded "the potential to false positive signals” was the largest obstacle to social media adoption.

We are at a crossroad. "Social information is better, but we don’t know what to do with it. The bigger problem is not consuming, but analyzing social media data."

The complete survey results can be found here.

Creating Alpha

Deutche Bank did a fair amount of investigation into social media, recalls Lovas. "The head of quantitative strategy presented some findings at a Chicago trading show, and his results correlated what OneMarketData is finding: Social media impacts markets, yet the content of the news is less important than the volume of the news. This means the number of mentions is more influential than if the sentiment is good or bad."

Overwhelmingly, it's the equity asset class that benefit from social media, as social media is more directly correlated with how well those companies are doing. As for the traders of asset classes, 53% considered equity traders the most likely beneficiaries of social media data, followed by futures and options (30.2%) and fixed income (5.7%).

“While there is still quite a bit of skepticism in the industry around the credibility of social media as a source to generate alpha, interest is rapidly growing as both regulators and market participants have signaled they are paying attention to the medium,” said Lovas in the press release.

Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio

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