The results of a survey conducted by tick data management and analytics company OneMarketData were released today, detailing the use of social media by trading and investment firms.
Social Trading And Capturing Alpha
Market participants from the buy-side and sell-side, along with financial experts from the academic world provided information about their current and planned use of social media to make trading decisions.
This particular company conducted a prior survey this year on social media usage, although in that instance it related to potential caution in the use of social media in financial markets subsequent to the Hash Crash of April 23 this year, in which hackers posted confusing information on Twitter in order to purposely affect the markets, resulting in plummeting markets.
In this particular survey, of the market participants surveyed, more than half responded that social media provides opportunities to capture alpha on a daily basis.
Alpha capture is an automated process used by banks and other trading firms to submit trading ideas to clients in an electronic format. The term capturing alpha is an industry term which refers to the intended purpose of such systems to help investors find market-beating returns. Certain forms of social trading such as that offered by signal providers, could fall into this category.
From another perspective, whilst only 18 percent of respondents confirmed that they are using social media data today, another 35 percent said they are currently researching how to incorporate social media into their trading and investment strategies.
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Equity traders were considered to be the most likely beneficiaries of the use of social media data, according to 53 percent of respondents. More than 30 percent of participants said futures and options traders stood the most to gain from the use of social media data. Fixed income (43 percent said) and foreign exchange (29 percent said) were the asset classes whose traders were least likely to benefit from the use of social media.
While 75 percent of respondents said they thought social media could add value to both historical trend and near real-time analysis, 46 percent of respondents said their firms would not be using or investing in the use of social media in 2013. The biggest obstacle to a broader industry adoption of social media usage is its potential for false positive signals, according to 62 percent of respondents.
Louis Lovas, Director of Solutions at OneMarketData stated: “We’re in the middle of an important change in the way social media is being viewed by financial market participants”.
“While there is still quite a bit of skepticism in the industry around the credibility of social media as a source to generate alpha, interest is rapidly growing as both regulators and market participants have signaled they are paying attention to the medium.”
“As social media data continues to gain validation in the industry, demand for solutions that can harness the power and reduce the risk of this new data source will also grow. As we hit that point, our view is that social media will prove to upend the way market participants use information to trigger trading and investment decisions” concluded Mr. Lovas
A particular point of interest is that with so many widespread and well known social and copy trading platforms available now, and the result of this particular survey demonstrating that this medium has become an accepted means of basing trading decisions, it has still not attracted the attention of regulators around the world.
Should social trading, as indicated here, grow in usage in future, it will be interesting to note if regulators deem this a form of financial advice, especially if the signals are being provided by other traders and offered on a social trading platform for other traders to copy.
We have seen retail traders using copy trading firms such as Tradency and Zulutrade, now FX portfolio managers are able to access this data for multi account platforms as is the case with recently established MyInvest.