Social media evolving from alternative to established data source
Investors are awake to the importance of social media as a source of data on which to make investment decisions. A number of papers have alluded to this, including a recent report from Greenwich Associates, which said the phenomenon was seen as an alternative data source but would soon become established in investors' research toolkits. The sheer volume of data available will require some taming and it will be important in future for investors to adopt sophisticated filtering strategies to screen out noise. 

Social media has become a pervasive news source since it first emerged in the early 2000’s, becoming so influential that in today’s hyper volatile financial landscape it can even move markets.

Among the financial community, legendary investor Warren Buffet has some 1.23 million followers on Twitter, while US President Donald Trump – well known for his prolific tweeting activity both before and since entering office – has over 24 million followers. When influential people Tweet, the world takes notice.

George Goldman, Vice President and Head of Finance Sales at real-time social media alerting company Dataminr, said: “Market volatility driven by unexpected macro events can upend even the most robust investment strategy and while many people are aware that social media has become highly influential in the world of business, there is still work to be done to educate the institutional investment community about its power to move markets.”

Those with doubts about the statement above may be swayed by hearing that the investment community seems to agree. Recent research by Greenwich Associates found that 80% of investors want greater access to alternative data sources, including social media, with 70% believing that real-time market data provides them an edge.

“Alternative data will only be alternative for so long,” says Kevin McPartland, Head of Research in Greenwich Associates Market Structure and Technology Practice, and author of a new report entitled, Alternative Data for Alpha. “These data sources and providers will quickly become part of portfolio managers’ standard toolkits once the existing roadblocks are taken down.” (Alternative Data for Alpha – GA Q1 2017)

There are already encouraging signs that investors are waking up to this realization. An earlier study conducted by Greenwich Associates indicated that almost half of investors have been prompted to perform additional research on an industry issue or topic based on social media, while a third say social media has triggered discussions with an investment consultant. (Institutional Investing in the Digital Age: How Social Media Informs and Shapes the Investing Process – 2015)

Given current growth trajectories and the growing accessibility of the internet globally, it seems likely that social media will only become more important in the way the public and investors consume news. However, the sheer bulk of potentially useful information available on social media means it is also important for firms to filter what they receive and use sophisticated tools to analyse that information before making investment decisions.

Any investor looking to benefit from social media feeds will inevitably need to seek out a technological solution that can help filter out the noise and surface relevant trading signals. The market impact of news breaking from unknown or non-traditional sources has become more and more significant. Traders need a way to stay on top of the “unknown unknowns” and ensure they keep ahead of the next unexpected market moving event. A challenging task, but as social media platforms become ever more sophisticated, so too are the tools being deployed to trading professionals to analyse it.

In the coming years, the popularity of social media will undoubtedly continue to expand, ensuring it will become a more influential source for differentiated and real-time market insights. Investors risk being left behind if they don’t find a solution for staying on top of the social media revolution.