Every day 500 million tweets are tweeted and 293,000 statuses are updated every 60 seconds on Facebook. Think about that…..social media is growing rapidly and expanding to new regions across our world at a rapid pace. Social media has completely changed the way people invest and think about the markets; many firms and hedge funds are using data analytics to spot trends among consumers and generate profits from those trends.
The Power of Social Media:
Individual tweets and posts now contain enough notoriety and credibility to influence the movement of the market. For example, two prominent short selling firms–Citron Research and Muddy Waters were essentially hijacked with the creation of fake Twitter names and caused mass panic on Sarepta Therapeutics ($SRPT) causing shares to plummet 16-28%. The shares then recovered roughly ten minutes after the tweets were posted and the perpetrator only profited $97 (due to the fast correction). This is just one example of many of how social media can quickly impact the price of a company's stock.
Twitter shares were also greatly impacted from social media when Steve Ballmer welcomed the new CEO via Twitter. After the tweet was posted, Twitter shares jumped 5% respectively.
Example of Tesla ($TSLA) shares being positively impacted due to Elon Musk tweeting about a future product.
The reason for the heavy short-term price fluctuations is due to the heavy volume created by retail investors.
So How are Firms Capitalizing on This?
Many firms and hedge funds are investing large sums of R&D money in big data in order to predict potential sales and earnings trends. For instance, an Irish research firm, Eagle Alpha was able to predict that Electronic Arts ($EA) would sell more copies of their latest Star Wars video game then what was initially forecasted by condensing 7,416 Reddit comments. Months after this prediction, Electronic Arts ($EA) raised their sales forecast based off excitement for the game.
The quants at Goldman Sachs Asset Management noticed increased web traffic to Home Depot ($HD) after monitoring Alexa.com and other web-trafficking sites. The asset management team loaded up on shares after they spotted this un-proportional hiccup within the current trend; the company then released a positive outlook months after Goldman spotted the hiccup.
The demand for software that can predict future trends within big data have become increasingly high. Many firms/funds, such as hedge fund, Point72 are calling this the “golden age for new investment data sources.” Dataminr's objective is to detect large scale events that can potentially shift markets over short periods of time. It has now become a device that is essential for hedge funds to have. The software is able to identify tweets that have been posted by verified accounts and average accounts; tweets are then classified into different classes (political, financial, product). The software looks for “black swan” events, which are basically individual media outputs that have the potential to move the market; this Datminr software helps create opportunities for institutions to get in before the action.
The financial technology industry is growing on a large scale due to the pin-pointed accuracy it has with short-term success. Big data is now more reliable at predicting price points of individual securities then some technical strategies. Big data is the future of investing and needs to be applied in everyday investment strategies.
He is pursuing his Business Degree with a concentration in Finance at the University of Arizona in Tucson, where he is also a Division 1 Cross Country and Track & Field athlete.