The Changing Views of Social Media and its Impact on Trading

Social media, particularly in the current time when political chatter is so prevalent, has become somewhat of a flash point for news. Social media commentary has seeped into the mainstream so seamlessly that traditional news sources (hmmm, does such a thing exist any longer?) regularly cite items from social media sites and an increasingly large portion of society admits to using it as a primary source of information. We are at a time when the activities of the influential social media companies, Facebook and Twitter most of all, are in the crosshairs of politicians, news media and regulators, and seemingly everyone has a opinion of how they should filter and dispense the information contained on their platforms.

We are well-versed by now on the important role that alternative data plays in the capital markets business, used as key components in models that guide portfolio construction, trading and risk management. Sentiment data, ostensibly fueled by the rapid-fire commentary on Twitter and postings on Facebook, is one of the key components of alt data that financial institutions work into their trading algorithms capturing nearly a 7% share of the alternative data market (see Chart).

The practices of some social media companies are now under the microscope of moral, ethical, and even regulatory scrutiny, placing in question how they will operate what they will publish. Social media sentiment has become a constant input to trading and investment programs, incorporated with other alt data and more traditional data to help identify the predictive signals critical to successful trading. Hence, the ways in which Facebook and Twitter are driven to change their rules for publishing social commentary—either by external mandate or internal policy—may very well alter the programs that depend in part on social sentiment. If Twitter filters comments, what does that do to the models built on that data?

Consider the situation—topical today—of a trading algorithm for the pharmaceutical industry, where multiple firms are working frantically to test new drugs to treat COVID-19. Thoughts, rumors, and genuine news all flow through social media outlets like Twitter by the minute, ranging from totally positive to wholly negative, and trading algorithms are built to expect these reactions and capture this data, analyze it and respond according to their programmed code. Consequently, when Twitter chooses to filter or otherwise edit or censor any of these comments, the trading programs now need to adjust its expectations again, challenged to adapt to the new rules.

Alternative data is expected to be the fastest growing segment of data in 2021 (see Chart). How will the deployment of alternative data in AI adjust? If social media sentiment is altered by regulators and politicians, or even the changing public sentiment, how will it affect trading’s dependence on alternative data? Alternative data has indeed become mainstream and is commonly deployed by traders in their everyday analysis. However, unlike fundamental data, because of its still-emerging definitions, much of what we today call alt data is subject to frequent change. The uncertainty around some kinds of alt data often centers on its questionable reliability and lack of deep and proven history.

The universe of data is changing. The amount of data is seemingly endless and the analysis of it often untapped. As the sources and uses of data evolve, so too do the controls put on data and the public reaction to how it is used.

It is still early in the game, but this much is certain. Changes in how social media companies publish their data and make it available for inclusion in programs will impact not only what we say, but how we trade.

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Robert Iati is the Director of Burton-Taylor’s Market Data Research and Strategic Consulting businesses.  Burton-Taylor offers unique insight into the Global Market Data Industry. Subscribers to Burton-Taylor’s Market Data research service get access to our library of content including our annual Market Data Benchmark as well as reports covering industry M&A activity and special reports focusing on specific segments within the industry. Visit our newly redesigned website at https://burton-taylor.com/ and contact info@burton-taylor.com for more information on our subscription packages.

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