Whenever there is a new piece of technology, finance figures out a way to butcher it. Using social media for sentiment analysis is a great tool for manufacturers who don’t sell directly to the consumer to get advance warnings of shifting tastes or possible product recalls. If you look at the lead times between when the product is boxed and shipped to the retailer and when sales turnover numbers make their way back to the manufacturer, twitter is a god send of an early warning system. For example, it makes sense for a company like P&G to invest in social media monitoring tools to make sure that a new fragrance they released into the market is not met with backlash that spirals out of control.
However, I have seen a significant uptick in data vendors pushing social media sentiment analysis tools onto traders. Now traders can react to twitter sentiment in real time. Does it really make sense or did we just find a new way to lose money?
First, do investors really know how to gauge the impact of bad publicity on the stock price? For example, if P&G released a purfume that people on twitter hated, should investors really care and by how much?
Second, the stock markets are reflexive. Investors will say a lot of nice things about a company whose stock is going up and will start finding faults with it when it starts going down. You don’t need twitter to tell you that.
Third, does it really matter what they say? For a day-trader, the order-book summarizes how others are voting, in real-time, with their own money, on where the stock should trade. For investors, daily or weekly charts neatly summarize the sentiment of people willing to bet their capital, i.e., people who put their money where their mouths are.
Fourth, it only makes sense if you get this news ahead of everyone else who is going to react the same say as you did. For example, Reuters releases the University of Michigan Surveys of Consumers to “ultra low-latency” subscribers 2 seconds before it is made widely available. Since you might expect all investors watching this news to react the same way, those 2 extra seconds allow you the front-run the “muppets”, so to speak. But if only you have the news, and nobody else cares about it or have differing opinions on how it is going to impact the stock, then it makes no sense for you to have it.
And lastly, remember this: the market is the news.
