Recently in the CME Group’s blog, Open Markets, they spoke with the TABB Group’s?Valerie Bogard, a research analyst, and discussed the role of social media tools such as Facebook (FB) and Twitter (TWTR) in the trading and investment process.
Here at The Options Insider we’re a fan of both and enjoy reading how they affect the markets. Take a look at a few Q and A’s from their discussion.?
Open Markets: It?s easy to be skeptical about the latest Internet trends. Can market participants really learn anything of value by listening to what people are saying on social media?
Bogard: There is a really big potential here and people want to get ahead of the curve and familiarize themselves with it before it really takes off. It can give you a clue to pricing before other people find out about it. Studies have found significant correlation ?between social media sentiment and pricing. It you are able to see that before others, then you have an edge.
I think the skepticism is waning, to a degree. Sentiment analysis is increasingly able to weed out signs that are not important and focus on things that are. Sentiment analysis definitely has the potential to generate alpha, which is harder and harder to do.
Open Markets: Why are investors taking social media more seriously now than they were a year or two ago?
As more and more people use social media, the more important it becomes for investors to use social media. It is easier to mine for valid insights when you have a larger data set. And the tools have turned out to be effective in some situations. There was the case of the iPhone 4S. The media initially said that there was not a lot of positive public reaction to its launch. But sentiment analysis of what people were saying about the phone on social media showed that they were really excited about it. In the end, Apple?s earnings confirmed that social media sentiment was correct.
?And social media was able to identify that the ?hash crash? was a hoax before the media was able to do so. [the hash crash occurred on April 23, when hackers hijacked the AP Twitter account and erroneously reported that bombs had exploded at the White House, injuring President Obama. Stock prices fell in response to the erroneous report.
Open Markets: What is the potential of social-media in algorithmic trading?
We believe many firms are hesitant to integrate all types of social media into algorithmic trading methods because it?s still hard to understand the full context of short posts.