For investors who may struggle to access highly expensive ‘listening’ systems or take advantage of a bigger investment firm’s resources, this could be priceless. A few minutes is a lifetime when it comes to making trading decisions, and failing to act on developing noise can leave people falling behind.
Looking back on these past few weeks and ‘Black Monday’, European stocks plummeted and US equity markets were bracing themselves for the worst after Chinese shares experienced their worst day since 2007.
When it comes to macro factors like this, the world is watching and panic ensues when investors all try to make their moves at the same time.
Of course, this was sparked by the Chinese central bank devaluing the yuan, and it was hard to miss. The impact of this as we move forward, however, is that there is obvious momentum and people are keeping their ears to the ground far more than usual when it comes to the stocks they hold. Those who want to stay one step ahead would do well to look beyond the obvious channels.
If the ECB has woken up to the benefits of social media listening, and so much so that it explored it in the level of detail its report offered, you can bet your bottom dollar it is already being used beyond retail investors.
Technology moves quickly, so don’t be surprised if big institutions, pension providers and fund managers alike are using these innovative tools to supplement their traditional monitoring systems. With social media so ingrained in our daily lives, there’s no reason we shouldn’t all be making the most of it in this way.
Gareth Mann is chief executive of Trading.co.uk
Online sentiment: The ECB’s view
In its report, ‘Quantifying the Effects of Online Bullishness on International Financial Markets’, the European Central Bank noted that daily Twitter bullishness can be a useful indicator of sentiment.
The report concluded: “The reliability and accuracy of existing computational measures of investor sentiment leaves much to be desired. We therefore propose a direct and unambiguous measure of investor sentiment, namely the relative frequency of occurrence of two terms commonly used by investors in Twitter updates and Google search queries.
“Our analysis shows a positive correlation between Twitter bullishness and Google bullishness on a weekly basis; furthermore, it finds that the former leads changes in the latter... More importantly, we find that daily Twitter bullishness leads stock index returns in the US (Dow Jones, S&P 500, Russell 1000, Russell 2000), the UK (FTSE 100) and Canada (GSPTSE), but has only very modest predictive value in respect of the Chinese stockmarket.”
However, the report acknowledged that while high Twitter bullishness “predicts an increase in stock returns, we observe that these return to fundamental values within a week. Our research thus appears to support the hypothesised role of ‘investor sentiment’ in behavioural finance.”
