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Social network: a new trading tool

The use of social networks in finance is no longer limited to communication, marketting or recruitment. Considered as relevant information databases, social networks are now included in news trading systems...

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Already known to be a powerful vehicle of communication with private clients, social networks, helped by recent events, have shown a new image: real-time information platforms.

This success is strongly linked to the concept of self-sharing, which contributed to the success of the web in the field of IT, and which is translated here into media self-coverage in the area of news. Access to information is critical in finance. Thus, one can easily understand the use, by financials, of social networks as an additional or complementary source of information in order to monitor existing investments strategies.

But the story does not end there; we can go further and generate investment signals: according to CNBC, a London-based hedge fund, Derwent Capital Markets, said it had successfully marketed a new venture to a series of high-net worth clients that makes investment choices using information gathered from over 100 million daily tweets!

The fund, Derwent Capital Absolute Returns, is scheduled to open for trading in early April and has already attracted at least £25 million in investments. The fund analyses tweeter’s data to gauge market sentiment

The academic world has already addressed the use of social networks as a source of relevant information. John Bollen, a professor at Manchester and Indiana University, published, last October, an article arguing that the number of emotional words on Twitter could be used to predict daily moves in the Dow Jones Industrial Average. A change in emotions expressed online would be followed less than a week later by a move in the index with 87.6 percent accuracy.

“Sentiment and mood dramatically change the impact of positive and negative news stories,” said Paul Hawtin, co-owner of Derwent Capital , in a telephone interview. “If the market is in a very positive and bullish mood, it can shrug off bad news" Derwent is in discussions to hire John Bollen.

More generally, the innovation lies neither in the notion of market sentiment nor in the use of news but rather the specific source used.

We live in an era where data grows faster than the technology to process it. The winners in trading would be those who are able to generate knowledge out of unstructured information
Gideon Ozik

Indeed, Gideon Ozik, investment management expert who specializes in media and finance, reminds us that two types of media-based strategies have emerged:
-"market timing" which relies on measuring the aggregate “mood” (sentiment) of the public to generate buy/sell orders on broad market index
-"event trading" which relies on a quick identification of event (corporate merger, earning surprise etc.) and a speedy electronic execution.

In a research, Ronnie Sadka and Gideon Ozik show that the significant power of media-trading strategies comes from the ability to process vast amount of information, from thousands of sources (including social media) and about thousands of entities.

"It is really the knowledge acquired through linking many sources to many entities that allows extraction of the alpha."

Social networks contribute to broaden the spectrum of information analysis. However, one might reasonably fear that the high level of "screening" of all available information might force companies to set up "social network" compliance rules for "sensitive employees", comparable to the financial investment statement

Next Finance March 2011

Article also available in : English EN | français FR

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