The dawn of the social media markets age

May's 'hash crash' was a shot cast over the bow for Twitter-keen traders, and the vendors that support them, but with revised methodologies, automated Twitter reading technologies may have lurched a half-step ahead of traditional trading strategies.

As with many new technologies, Twitter - and social media more broadly - was initially hailed as an information panacea - applicable to everything, and surely beneficial to areas where the rapid dissemination of information was key. Financial markets seemed to fit the bill, but not much happened.

Now, it seems, the micro-blogging website has breached a barrier rival social media sites have failed to, and its data can be injected directly into trading decisions.

This week, results of a study by Knowsis, a firm dedicated to developing technology and methodologies around social media strategies for investors, were released. It used social media sentiment to craft simple trading strategies - with broadly positive outcomes. 

The results: the strategies showed a 46% annualised return for a portfolio of stocks compared to 13.6% for the S&P 500 over the same period. While this headline figure may gloss over the intricacies of making trading decisions based on 140-character snippets of text, it does suggest the era of social media has well and truly engulfed financial markets.

Knowsis crafted its methodology around one core idea: will sentiment make a difference to asset prices?

Deciding if what is said on Twitter by specific individuals or organisations will affect the market seems fraught with complexity, nuance and quite frankly, danger. Last month's Twitter crash, where Associated Press' Twitter feed was hacked and spat out false breaking news of a White House attack, confirmed that markets are ever vulnerable to breaking news, regardless of its integrity. Firms like Knowsis will have to craft their tools to absorb such abnormalities as best they can, but one expects markets to continue reacting shockingly to shocking news.

A major factor in social media's rise in markets set to continue will be the growth of Twitter as a news outlet - or rather as a forum for news outlets and influential (and non-influential) individuals to voice ideas, opinions and news in the fastest consumable format.

The take-up of these technologies will run in tandem with automated news reading tools that scan trusted online news websites to establish sentiment - positive or negative - for a particular financial instrument, and feed the information into algorithms that execute trades based on that information.

Social media's impact on markets and trading has appeared somewhat muted until now, but when real - and possibly higher - returns are at stake, the distance between a Twitter feed and traders' blotter will surely shrink.