Twitter Increasingly Used By Hedge Funds For Trading Clues

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Wall Street could be monitoring your social media communication to develop trade ideas.

Much like quantitative traders look at market pricing data to develop trading algorithms, hedge funds are now looking at social media traffic

As Bloomberg and Thomson Reuters terminals add to their terminals filtered feeds from Twitter Inc (NYSE:TWTR), a group of Twitter data miners has emerged that provide analytic measurement and advice to assist hedge funds in making trades, the Wall Street Journal is reporting.

Currently select larger quantitative funds are purchasing the data from the likes of Hedge Chatter, Eagle Alpha, Market Prophit and Filmmaven.  These firms use quantitative filters to simplify and streamline results so that hedge funds can target only the tweets that are statistically important.  A significant issue is false positive tweets.

According to a new white paper from Grip, a firm that analyzes Twitter data and was purchased by Twitter Inc (NYSE:TWTR), the market is divided into those that monitor and those that interpret social media chatter.

Twitter causing a flash crash

During April of 2013, after a Syrian terrorist organization hacked into the Associated Press Twitter account, a Tweet was delivered that had the keywords “explosion” and “White House” in a single message.  This sent the computers at Dataminr buzzing, as they sent algorithmic sell signals to a variety of computer-driven hedge funds in the blink of an eye, which sent the stock market tumbling 145 points in a matter of seconds.

Dataminr is the first known example of Twitter Inc (NYSE:TWTR) causing a flash crash, but other data is more studied in nature, focusing on patterns of conversations that provide clues towards trends in the market place, such as determining the popularity of a product or brand.  This practice is termed “social media analytics,” where the data miner uses social media chatter to learn about companies or the economy with the goal to identify past patterns between data flow and asset prices.  This is a common technique utilized by algorithmic traders, who analyze reams of market pricing data to build algorithms that issue buy and sell recommendations.

Social media slippery slope for financial firms

Social media has always been a slippery slope for financial firms. Traders are often barred from utilizing social media from the trading floor, and those engaged in working with retail investors have been closely scrutinized by compliance departments and discouraged from engaging. By delivering Twitter and other social media in a read only format, the report noted, social media is moving into a realm where compliance departments are opening their minds to accepting this new market tool.

“Compliance is getting stricter by the day and if it’s not in the workflow, they won’t see it,” Emmett Kilduff, founder and chief executive of Eagle Alpha, was quoted as saying.  He says demand for his service, founded in 2012, is steadily increasing.

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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