On November 11, 2013, a few minutes after 8 a.m. EST, news leaked out from a Canadian newspaper that Blackberry’s (Nasdaq:BBRY) $4.7 billion buyout had collapsed. Wall Street wouldn’t find out for a full 180 seconds, when the newswires picked up the report in real time.

Investment clients at Dataminr, a New York City-based data analytics firm, had a leg up on the rest of the Street. They received an email alert from Dataminr within seconds of the Blackberry news appearing in the Canadian newswire, and many of those clients – especially hedge funds – used the news to short the stock ahead of the rest of the investment community, who were late getting the news on Blackberry.

Another social media data analysis firm, Social Market Analytics, used its coverage of 400,000 Twitter (Nasdaq:TWTR) accounts last August to tell its clients that positive chatter on Apple was percolating just before legendary trader Carl Icahn issued a Twitter statement stating he had purchased a huge chunk of Apple (NYSE:AAPL) stock.

On both fronts, those early birds made a bundle on the alert and showed others that leveraging social media to get the fastest news impacting stock prices wasn’t just a theory, it was a reality.

Four months later, so-called “social sentiment indicators” are making big waves in stock market circles, as more evidence pours in showing that SSI really does give investors who leverage the technology an advantage over those who don’t.

According to a study from Markit, a financial data services provider, from December 2011 to November 2013 positive social media sentiment stocks have shown cumulative returns of 76% compared to -14% from negative sentiment stocks.

Back in 2010, Johan Bollen, a business professor at Indiana University, reported that Twitter data could predict the Dow Jones industrial average with 87.6% accuracy.

“There’s been a dramatic shift in the information landscape,” said Ted Bailey, founder and CEO of New York-based Dataminr. “Information is getting on sources like Twitter early and in advance of what the Street is watching.”

Tweets That Beat the Street

While Facebook (Nasdaq:FB) offers some data mining opportunities, Twitter is the real hotspot for social indicator analytics. Twitter is a beehive of social media activity, with 645 million active users and 135,000 brand new users every day. Until 2012, however,  the technology didn’t exist to splice, dice and slice Twitter feeds to discern fresh trading data. Once social sentiment indicator analysts began figuring out how to quantify all that streaming social media data - and offered the results to professional investors - they made good profits.

Now firms like Dataminr, Datasift and Social Media Analytics employ data analysis technology to sift through Twitter feeds from insiders at publicly-traded companies. Last year, social sentiment analysis hit the big time with financial giant Bloomberg adding Twitter messages to its financial data delivery service. Bloomberg includes tweets from Wall Street analysts and regulators, economists and United States government agencies, boils all those tweets down and ships the relevant data to its roster of clients (mostly stockbrokers, traders and hedge fund managers) who then use that data to stay a step ahead of the competition when buying and selling stocks.

Twitter realizes the value of its huge volume of tweets to the investment community - it earned $47.5 million from its data licensing service in 2012, a 66% uptick from 2011.

According to Tom Watson, a product manager at NYSE Technologies, which recently inked a new partnership with SMA to disseminate social media indicators to financial clients, “The financial services industry has been watching and listening to social media for a while. Now they’re increasingly using and contributing to social media platforms and trying out different trading strategies based on sentiment.”

The technology, unsurprisingly, is highly sophisticated. For example, SMA relies on algorithms designed around key Twitter criteria – including averages, change, volume, volatility, dispersion of tweets and risk - to generate what company analysts refer to as “S-Scores," which are evaluations based on all of the above algorithms that mirror sentiment on a given stock, over a historical period of time (called a “lookback” period.)

These sentiment scores indicate whether the prevalent chatter is good or bad news for a given stock. With that information in hand, clients can act accordingly and trade the stock based on the sentiment score.

Too Much Data

That’s not to say social media indicators are easy pickings. Joe Gits, founder of Social Media Analytics notes that 90% of all the Twitter feeds that SMA analysts dissect are discarded - it’s the other 10% reveal investment opportunities investors are clamoring for. “The key problem stemmed from the fact there was no way to quantify the data,” says Gits. “Twitter users can’t open up 100 different Twitter streams and accurately analyze the results.”

Social media investment indicators do have a down side, however. It’s fairly easy for con artists to create Twitter feeds similar to publicly traded firms and to throw investors off the right track by tweeting false news about a company, like the buyout of an industry competitor or “foreshadowing” new product launches. Investment fraudsters purchase shares of the stock in advance and profit from Twitter watchers who fall for the bogus news.

The Bottom Line

No doubt, social media investment analysis is an ascending, but very much nascent, technology; so far it’s a winning one for Wall Street’s early birds. Should you sign up for alerts from a social media investment analysis firm? It won’t be easy; most products and services from data providers are geared toward institutional investors, not the Main Street tavern owner fiddling with his 401(k). There are, however, some options. Bloomberg’s Eikon trading platform, available to retail investors, offers a Twitter data tracker for free as part of the platform. StockTwits also offers an entry-level Twitter investment news tracking system, but you’ll hear from astute investors and amateurs alike, so, as always, buyer beware.


Related Articles
  1. Investing News

    Why Facebook Investors Should Fret That Young Teen Users are Leaving the Nest

    David Ebersman of Facebook told Wall Street analysts during a conference call that Facebook during the third quarter the company did see a decrease in (teenagers’) daily uses, especially younger ...
  2. Personal Finance

    How To Ruin Your Career Using Twitter And Facebook

    Many people use social media in their professions. However, sometimes things can go wrong. Here are some things you should be aware of when using social media at work.
  3. Investing News

    Should You Buy Facebook When It's Cheap?

    Investors are conflicted over whether Facebook is a great value play. Find out if you should get in while it's affordable.
  4. Investing Basics

    10 Twitter Feeds Investors Should Follow

    You may not have time to follow these Twitter feeds all day, but some of the larger, commercial feeds are worth watching.
  5. Personal Finance

    How Much A Facebook Fan Costs

    Here's a breakdown of cost per Facebook fan, as well as some methods for keeping your marketing plan under budget.
  6. Investing

    3 Things That Can Make Or Break Facebook

    The social media site is set to go public soon. Can it stay at the top?
  7. Personal Finance

    Evaluating The Facebook IPO

    Facebook's IPO is sure to be the biggest IPO of the year. Find out what to expect.
  8. Personal Finance

    How Twitter Changed Business/Consumer Relationships

    In just six years, Twitter has not only revolutionized social media but also the relationship between consumers and businesses.
  9. Retirement

    5 Top CEOs On Twitter

    These high-powered CEOs are on Twitter, sharing their thoughts on business, politics and current events. Find out what's on these millionaire CEOs' minds.
  10. Economics

    Twitter: The Newest Stock Market Indicator

    Investors and traders are always looking for the next best method for predicting the future price movements of the financial markets. The latest relies on social media.
  1. How is working capital different from fixed capital?

    There are several key differences between working capital and fixed capital. Most importantly, these two forms of capital ... Read Full Answer >>
  2. Do variable annuities guarantee returns of principal?

    Variable annuities are subject to the ups and downs of the market, so they do not guarantee returns of principal. To mitigate ... Read Full Answer >>
  3. Should I sell my shares if a company suspends its dividend?

    Since 2008, when the Federal Reserve slashed interest rates to zero and then kept them there indefinitely, dividend-paying ... Read Full Answer >>
  4. How do hedge funds use leverage?

    Hedge funds use several forms of leverage to chase large returns. They purchase securities on margin, meaning they leverage ... Read Full Answer >>
  5. How safe are variable annuities?

    Life insurance companies are facing a challenging environment. Those that sell variable annuities have been able to mitigate ... Read Full Answer >>
  6. Are mutual funds considered retirement accounts?

    Unlike a 401(k) or Individual Retirement Account (IRA), mutual funds are not classified as retirement accounts. Employers ... Read Full Answer >>
Trading Center