Posts on social networks such as Twitter Inc. and Facebook Inc. can affect stock prices as more investors start to monitor the information, according to research from Colt Technology Services.
Colt, which based its research on responses from 360 U.K. financial-services workers, said 63 percent agreed that the valuation of individual shares can be directly linked to sentiment on social media. Still, only 7 percent would base trading decisions on information gleaned from the websites, Hugh Cumberland, Solution Manager, Payment & Settlement Services at Colt, said in an interview. About 45 percent regarded social media as a trailing indicator and used them to validate their trading decisions, he said.
“The numbers demonstrate the immaturity of the area,” Cumberland said. “Addressing anxiety over data integrity requires confidence that the tools can accurately separate credible data from the general social noise, along with maliciously generated content.”
Rogue traders, corruption, money laundering and tax fraud can trigger the greatest short-term losses on companies’ shares, according to a December review of how crises affect listed firms and the make-up of their boards. So-called behavioral crises “spook markets the most,” with shares at times falling by more than 50 percent on news breaking of company or employee misconduct, according to the report by law firm Freshfields Bruckhaus Deringer LLP.
DCM Capital, a London-based company formerly known as Derwent Capital Markets, started a hedge fund using social media to gauge sentiment in August 2011. The Derwent Absolute Return Fund closed three months later. Last month, the company opened a spread-betting platform called DCM Dealer that included a feature to calculate sentiment for individual stocks, indexes and commodities.