Social Media: Analyze this

In some cases, this increased focus on the influence of social media is inspiring the development of new research tools. For example, SentiQuant, which is produced by Quantheta LLC, a New York-based financial data analytics company, collects and analyzes the social media chatter surrounding more than 7,500 stocks in multiple industries and sectors, as well as exchange-traded funds (ETF) and currencies.

“On a basic level, market dynamics are simple: if there are more bulls than bears, the stock will go up, and vice versa,” according to literature about SentiQuant, which is available in Canada and the U.S. “Thus, having an understanding of market sentiment is crucial to any investor in search of catching that elusive alpha.”

In addition to providing a snapshot of the sentiment and amount of chatter surrounding individual securities, SentiQuant also offers predictive analytics, using social chatter, news sources and proprietary analysis to determine whether a stock’s price may go up or down.

However, that feature is not meant to be a guaranteed indicator of stock movement, says Patrick Houlihan, co-founder and CEO of Quantheta.

Another SentiQuant feature is the “bull/bear” index (BBI), which extrapolates social sentiment from everything SentiQuant tracks, then compares that to the performance of SPDR S&P 500 ETF, which is managed by Boston-based State Street Global Advisors, a unit of State Street Corp. This exchange-traded fund (ETF) often acts as a benchmark of the overall marketplace, Houlihan says.

When the BBI hits very high or low points, those moves have been shown to precede major market movements, says Houlihan, who suggests that his BBI forecasted the dramatic plunge in global financial markets on Aug. 24.

The BBI indicated that investor sentiment was dipping this past summer, with significant declines in late June and early August. The price of SPDR S&P 500 ETF was somewhat steady during these periods. However, in late August, investor sentiment experienced its most significant drop of the summer, and the value of the ETF plunged just after sentiment sunk to its lowest level.

On Aug. 24, various indices fell dramatically, with the S&P 500 composite index losing about 77 points and the S&P/TSX composite index dropping by more than 400 points.

Houlihan is not the only party to make a connection between financial market movements and what people are discussing on social networks. An academic study conducted jointly by three U.S. universities and published in 2013 found that the level of negativity in articles and comments from one investment-focused social site, www.seekingalpha.com, precedes negative stock returns.

Bloomberg and Thomson Reuters also acknowledge the importance of social media discussions and have incorporated information from social networks into their research tools for financial services professionals.

Thomson Reuters’ Eikon service has received awards for its social-media monitor, which, like SentiQuant, analyzes the sentiment of discussion surrounding stocks. Eikon won the title of Financial Sector Innovation of the Year at the 2015 FSTech Awards, which honour the best in technology for the financial services sector in the U.K. and EMEA (Europe, Middle East and Africa).

Individual traders use social media to receive market news quickly, but do not make that information public because they do not want to give away any advantages, says Philip Macartney, vice president of EMEA in Dublin with Halifax-based Affinio Inc., an analytics technology company.

“Traders don’t want to tell you what they’re thinking until after the trade,” says Macartney, who formerly was global head of social at Saxo Bank AS in Copenhagen. “You don’t want everyone getting there at the same time as you. You want everyone getting there after you.”

Houlihan concurs: “There are people who are doing this and they’re not going to let anyone know. No hedge fund manager is going to say, ‘I’m using social media and I’m making a fortune’.”

Hilliard MacBeth, advisor with Richardson GMP Ltd. in Edmonton, does not believe the practice is widespread among Canadian financial advisors. However, he is an active user of social media who employs his online networks to learn more about sectors and companies not covered by the traditional research community.

MacBeth has an avid interest in alternative energy sources, but finds coverage of this topic is lacking among mainstream analysts. So, MacBeth developed his own network of individuals who post items about the subject on social media.

MacBeth does not use this information to decide whether he will include a particular company in a portfolio, but he does call social networks great “idea generators.”

“We’re all looking for ideas,” he says. “The problem is, with so many smart people following the stock market, it’s not easy to come up with new ideas and original research. It’s really hard to add extra performance if everyone uses the same 100 stocks.”

MacBeth uses his social network to brainstorm new investment avenues to explore, then looks for more established research in order to investigate an option further.

Reputable bloggers are a good way for financial services professionals to learn more about investment options that are not necessarily on the list of every analyst, says Anatoliy Gruzd, director of the Social Media Lab at Ryerson University in Toronto, which studies how various online communities use social media to share information.

Blogs, which allow for longer-form writing and comments from readers, provide a more focused discussion of ideas. Readers will find that the same commenters return to a blog, Gruzd says, which will develop a community around a specific topic.

Finding a few sources you trust is the beginning step in developing a larger informative network, Macartney says.

Once you identify a few informed individuals through social networks, he says, you can see who they are following, and that process instantly becomes professional advocacy.

© 2015 Investment Executive. All rights reserved.