Rob Daly: The Curious Case of Social Media

Listen to any technology evangelist speak these days and you will no doubt hear that social media has created new opportunities to distribute and consume information like never before. The old centralized publish-and-subscribe distribution method has been replaced by a decentralized model where everyone is a publisher and a subscriber. Or to put it in more familiar industry terms, the world has seen a fragmentation of content as everyone becomes their own publishers.

But how important or insightful are the observations or rantings of a lone individual? It truly depends on the individual. However, aggregate them and one gets a good view of the current herd mentality.

A recent article published in the Financial Post revealed that researchers from Indiana University demonstrated that the “mood” of the posts on microblogging site Twitter accurately predicted moves in the Dow Jones Industrial Average (DJIA)  about 90 percent of the time, days in advance.

This capability has not been lost on Wall Street, which has been incorporating unstructured social media data into its market calculations for the past few years.

Vendors have been making it easier­—for example, complex event-processing (CEP) platform provider StreamBase Systems released an application programming interface (API) for Twitter back in 2009.

Most financial firms take the data and feed it into their sentiment engines looking for trends, while others use it to manage their reputational risk. Neither process truly involves adopting social media within the organization.

Besides possible communications between broker-dealers and clients, where could the industry logically adopt social media? According to one senior statesman of the market data industry, the over-the-counter (OTC) market is ripe for adoption, but he hedges his position  by saying that it might be a decade before the industry does so fully.

But is social media the proper model for the industry, I wonder? While individual users see a benefit to be gained from participation, those providing the network and selling the demographic information to third parties are making the real money.

This is nothing new for the capital markets. Everyone is familiar with the current market data model, where end users provide quotes to the market, and the exchanges and market data aggregators in return bundle it and sell it back to the community.

Social media will not change a thing, except how much data could be provided.

Look at the typical demographic data collected every day by the social networks. The Twitters, LinkedIns and Facebooks of the world know how often their users log in, what activities they prefer to carry out online, who their contacts are, and how regularly they interact with them.

Is this the sort of data that financial institutions really want getting out into the wild? Individuals might not know or care how much information they give up to the marketing partners of the social network providers, but the last thing firms want is to give the model makers in rival firms any data about their trading strategies.

Social media adoption might be inevitable as younger generations that have grown up with the technology come into the market and demand it, but this will be counterbalanced by non-tech-savvy regulators who drag their heels in regulating the new model.