KACPER PEMPEL/Reuters
Portfolio manager Martin Pelletier is turning to Twitter Inc. more often these days.
To build better portfolios for his clients at TriVest Wealth Counsel in Calgary, Mr. Pelletier, like an increasing number of investment professionals, scans Twitter feeds published by the likes of fixed-income fund manager PIMCO and hedge fund manager Tim Seymour for broader market insight.
On Twitter, "you're getting more information in a much quicker fashion than you would through more traditional media sources," he said.
As market participants look to social media for more immediate trading triggers, complex algorithms and analytical tools are also under development to gauge changes in investor sentiment on a mass scale.
The demand for such applications may help Twitter squelch skepticism that its free micro-blog model is worth its current $11-billion (U.S.) valuation and opens the door for other social media platforms able to make money off their ability to gauge public sentiment.
For any investors who doubted Twitter's influence on global markets, a tweet sent by The Associated Press at 1:07 p.m. on April 23 served as a lesson. "Breaking: Two Explosions in the White House and Barack Obama is injured," it said. Within seconds the Dow Jones industrial average plummeted and U.S. Treasuries spiked.
Six minutes later, AP confirmed that its tweet was sent by someone who hacked the news outlet's Twitter account. Investors immediately began to reverse positions taken in response to the rogue tweet.
The "hash crash," as the AP incident is now known, came just three weeks after the Securities and Exchange Commission ruled that companies can use social media to make material announcements, rather than issuing press releases. Twitter itself took advantage of the change. The micro-blog service announced its plan to raise up to $1-billion in a tweet that linked to its newly public financial disclosures. Suddenly, social media couldn't be ignored.
Now financial-markets participants are trying to get ahead of the game. "Everybody's trying to figure out what to do with social media information," said Doug Clark, the head of research at ITG Canada, which specializes in electronic trading.
A growing number of companies are trying to help them do just that. Two years ago, financial news and data giant Thomson Reuters, set up a team that specializes in social media. The mission: To build complex algorithms and data mining tools that gauge market sentiment and take cues from the online masses.
"It is not what I said, or you said. It is about what 'we' said," said Asif Alam, the company's head of 'machine readable news.' (The Thomson family, which controls Thomson Reuters, owns 85 per cent of The Globe and Mail.)
Instead of relying solely on analyses from investment advisors, established market strategists or traditional financial media, investors now have electronic tools available to them – such as Thomson Reuters – that can scan Twitter to gauge the sentiments of a large group, and then calculate the impact on affected securities.
The insights gleaned from these analyses could one day be so valuable that there is speculation Twitter may ultimately sell access to the underlying code for its data streams, the same way that TMX Group, the owner of the Toronto Stock Exchange, charges for access to its trading data. Such prospects are especially lucrative for the micro-blog company now that it is going public and needs to be profitable.
Mr. Alam stressed that any benefits come from using more than just one tool. "We really think the value of social media and Internet news is in aggregation," he said. For that reason, the electronic systems his team has set up scans everything from Twitter to Facebook to blogs of knowledgeable investors and academics.
Potential gains from social media mining aren't limited to investors. There is a growing realization that companies can, for instance, use these platforms to help them figure out who their investors are – something that's especially important for a junior mining company that has yet to attract big name money managers.
Dmitriy Mitchev, chief executive officer of Toronto-based Finmaven, which sifts through social and other digital media, said the scope is extremely wide. A former McKinsey consultant with a background in private equity, he launched his startup because of what he believes is a huge knowledge gap between what anyone in capital markets can do with social media, and what they are currently using it for.
Take Mr. Pelletier, who doesn't just use social media as a channel for market intelligence. He and his team post links on Twitter and LinkedIn that they think might attract attention, a strategy that, he claims, has drawn inquiries from potential clients. A recent example: linking to a Barron's story titled "Another 'Groundhog Day' Gain for Stocks" on why shares keep rising depsite weak economic data.
Despite the possibilities, Mr. Clark from ITG said some wariness remains. Professionals understand there is some untapped potential, but they are reluctant to rely on social media too much – especially after events such as the hash crash. Often, 140 characters doesn't explain enough to prompt a sophisticated investor into a position.
"There are going to be retail guys who follow people with big names," such as George Soros or Carl Icahn. "I'm not convinced that that's going to be the smart money." If Mr. Icahn is making a big bet on turning Talisman Energy around, for instance, "I want more than 140 characters to tell me why."
"It's a fascinating area" but "it's too up in the air," Mr. Clark said. "We're watching it from 20 yards away instead of 2 feet away."
Tim Kiladze