Strength in Numbers

By: Frank Freitas of Pluribus Labs

Markets are abuzz with discussions on the use of social media content in trading strategies. Institutional and retail investors alike are engaging with the data with the belief that it can inform and enhance their trading strategies. At present, seemingly the most common application is event detection; if market-moving information about a company can be gleaned from social media before it hits the newswires, opportunities exist for those who react quickly. With some pundits labeling platforms like Twitter as ‘the new news,’ this application certainly makes sense. And in fact, there have been notable examples of tweets that have moved markets in both directions, with savvy market participants profiting as a result.

Having access to this type of breaking information is obviously valuable – when it hits. In our view, though, monitoring the social media stream for tweets that present opportunities for information arbitrage is like finding a needle in a field of haystacks. Sure it’s fun, and as human beings we are mostly optimistic creatures, but there are other, more systematic ways of incorporating social media into trading workflows. In fact, I believe that it is appropriate to think of social media analytics as a new form of market data. And that’s where social media as an input to trading becomes really interesting.

Our research shows that transforming social media discussions into an aggregated view of sentiment about a particular company, industry or market can be incredibly valuable as an input to trading strategies. If you knew, for example, that a handful of names on your watch list this morning were going to exhibit outsized volume and volatility over the trading session, would that affect your strategy for the day? If you had predictive information about what the VIX would do today that augmented traditional volatility estimates, would that influence your interactions with the market?

These types of insights are available at both index and security levels on a daily basis – that aggregated views of social media really do matter. When you think about it, these properties of the distilled social media stream make sense. When informed market participants express their opinions about companies, securities and markets via social media, these opinions typically translate into trades. Further, when there are significant disagreements on the future prospects of a company expressed on social media platforms, this dissonance typically maps into more diverse opinions on price and greater volatility.

So, while I salute the search for that one piece of breaking information that will transform you into a millionaire with one trade, I encourage you to look at opinions in the abstract as well and treat them as an additional source of market color. I believe you will agree with what we see – that there truly is strength in numbers.

Disclosure: the author has no position in the stocks mentioned.

Lime Brokerage LLC is not affiliated with these service providers. Data, information, and material (“content”) is 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. 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. Lime Brokerage LLC does not endorse, offer or recommend any of the services provided by any of the above service providers and any service used to execute any trading strategies are solely based on the independent analysis of the user.

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