How Twitter can help investors stay ahead of the market

With more than 300 million monthly users and 500 million posts every day, Twitter is a clear powerhouse in the realm of social media. But staying in touch and following trending topics aren’t the only things the microblogging site can enable its users to do — Twitter can also keep investors stay ahead of the stock market.

Traders worldwide are figuring out what advertisers learned years ago: Twitter is ripe with information just waiting to be used. The instantaneous nature of the social media site allows users to get and provide real-time information from anywhere in the world. In fact, Twitter often delivers breaking news faster than traditional news wire services like Reuters or the Associated Press. Investors see the immediacy as a way to get an edge over the competition in an industry in which waiting can cost you.

“We are trying to detect events that are breaking out on Twitter before the press, the media and the world are hearing about it,” said Paul Hatwin, CEO and founder of hedge fund Cayman Atlantic, to CNN Money. Cayman Atlantic uses information found on Twitter to inform their trades.

Cayman Atlantic isn’t the only one using Twitter for trade analysis. Dataminr, a 6-year-old company founded by former Yale roommates, bases its entire business model on its ability to provide clients with up-to-the-minute news and information about stocks and companies from Twitter.

“As Twitter increasingly grows as a source for breaking news, Dataminr for finance delivers a relevant stream of content to financial professionals based upon their personalized portfolio of tickers, sectors and macro topics,” Ted Baily, Dataminr founder and CEO, told CBS News.

Indeed, the sheer volume of raw information on Twitter is a lot to dig through, but reporters, companies and influencers all turn to Twitter to break news and express opinions. This information itself can drive stock value up or down.

So how can traders sort out the market-driving news from the noise containing anything from celebrity gossip to hashtag activism? Many companies have invested in developing proprietary algorithms and filtering software to follow company names, retweets and $-tags (which designate stock symbols). Many of these algorithms also search for words like “rise,” “fall” and “warn” to determine whether the information found is positive, neutral or negative.

However, using the raw information by itself poses some risks to traders. In 2013, shortly after the US Security and Exchange Commission gave the greenlight for companies to use Twitter to release corporate news and other information, the Associated Press’s Twitter account was hacked.

The hacker posted tweet that claimed there had been an explosion at the White House and that President Obama was injured. Just minutes later, the Dow Jones Industrial Average fell 140 points. The market recovered quickly once the tweet was debunked, but this instance clearly demonstrates the influence of breaking news on Twitter.

Erroneous information like the AP tweet is one of the reasons raw information isn’t the only factor in that many algorithms and filtering software employ. Today, a lot of these algorithms also look for “sentimental” information — how the public feels about companies — in order to provide context to the raw information the algorithms find. This sentimental information is also classified as positive, neutral or negative and traders can then factor the information into stock performance analysis.

But how well can public sentiment predict a stock’s market performance? Surprisingly well, it turns out.

However, some experts are weary of depending on sentiment analysis. These experts are quick to point out that the algorithms do not have the capability to detect sarcasm or analyze the ever-growing arsenal of emoticons Twitter users employ. Many experts also point to the cautionary tale of London-based hedge fund Derwent Capital Markets. Derwent Capital made trades based on sentiment analysis. The fund went under after just one month in business.

Despite these shortcomings, sentiment analysis can be a good indicator of stock performance. A recent study published in August found that the correlation between sentiment indicators from Twitter and stock performance held true even in the absence of expected news, like an earnings report.

When used together with the raw information mined from Twitter, sentiment analysis can provide context for the raw information and give traders better insight into performance trends.

Additionally, Twitter may be the great equalizer when it comes to the trading game. Smaller investors may find Twitter a more attractive source of information than traditional means. When compared to the famous Bloomberg terminal, which can cost users up to an average of $20,000 a year, filtering services and algorithms like Dataminr are relatively inexpensive. These services provide real-time data to subscribers for a small fee. Traders can then analyze the information and use what they find to inform smarter trades.

Two more bold moves indicate Twitter may hold even more power than previously thought. In an effort not to be left behind, Bloomberg has begun to include the social media site in its terminals to help traders stay on top of breaking news.

Many banks and investment firms ban the use of social media sites like Twitter on their networks due to security and confidentiality concerns. By having Twitter built right in, the Bloomberg terminal continues to give traders the edge that they need to compete in the market, along with the necessary security and privacy they require.

The second sign that Twitter is more powerful than previously thought is that the social media site purchased the data mining service Gnip. Gnip sold the data it gathered from Twitter and other social media sites wholesale to hundreds of other firms. By purchasing Gnip, Twitter sent a strong message that the microblogging site has realized its own potential in the trading industry.

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