Programmatically trading off of social media

By Michael Lacasse
Director of Technical Account Management, Lightspeed Institutional

Social media is the new frontier in the financial markets. Ever since the stock market began, traders and investors have liked to talk about their positions and market biases. Before the Internet, these interactions were limited to the local investment club, barber shop or anywhere investors might gather. These communications were extremely narrow in scope and generally not relevant to the market as a whole. Not to mention not relevant to predicting market direction.

Today, this has changed.

With the advent of social media and sites like Twitter and StockTwits, literally millions of investors and traders let their opinion known about the market in real time. This broad nature of social media creates data sets that can be used by savvy traders to correctly anticipate market moves. In fact, a hedge fund was recently launched that breaks Twitter’s information flow into clear sentiment categories, analyzes this data, then takes positions in the market based upon it. Basically, the fund’s software samples about 10 percent of the tweets from 130 million plus daily tweets. This sample is then analyzed and divided into categories like calm, sure, alert, vital, kind, and happy. It then takes positions in the stock market based on the sample results. The goal is to determine market direction three to four days in the future. Sound ridiculous? Well, an Indiana University professor’s research has indicated that such a Twitter-based sentiment system can predict swings in the Dow Jones Industrial Average at 87 percent accuracy. However, as any sophisticated market practitioner knows, it’s a huge step from academic research findings to real-time market prediction. Others use social media on a more personal level, by locating successful traders who tweet out their positions and biases in real time and simply following along. While this method can work, it’s important not to become too dependent on following anyone in the market, no matter how smart or how great a track record the person has. Hot streaks can and do change at any time.

There is huge, untapped opportunity in designing programs to trade off of social media feeds. This is particularly true with the advent of stock specific feeds like Stocktwits. Remember, data is what drives financial prices. Utilize the data correctly and success will be yours.

Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.

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