Social Media & Stock Trading: How Your Tweets & Facebook Posts Influence Stock Prices

Technology is the ultimate disruptor: it has changed everything about everything. And the world of stocks has by no means escaped the tech onslaught. Social media is impacting stock trading in a big way and how we approach this disruption and harness the power of social networking is up to us, writes Ishita Rana.

 

Being a diehard fan of the movie The Wolf of Wall Street, I have always imagined the stock exchange as a large floor with huge monitor screens surrounded by chaotic ringing of phones with hundreds of traders shouting their orders.

 

However, since the Digital Revolution, technology has replaced men and there has been a shift to automatic trading with minimum human intervention using advanced computer programs and mathematical formulae. This is known as Algorithmic Trading or Algo-trading.

 

Algo-trading is a system of trading where complicated trading strategies are constructed into algorithms that use this information to inform users of any profit-making opportunity arising in the market and transact within a fraction of a second.

 

Just like it was said in The Wolf of Wall Street, the stock market is highly unpredictable: “Nobody knows if a stock is gonna go up, down, sideways or in f**king circles.”

 

Algo-traders try to bridge this uncertainty by feeding historical data and stats into their machine learning algorithms. When combined with live data from the internet, the algorithm studies patterns and takes trading decisions at lightning speed. Today, algo-trading constitutes nearly 70% of trading activity in developed markets and developing markets like India are swiftly catching up.

 

Social Media - The Puppet-Master of the Stock Market?

 

Social media is a big source of data that is mined by these algorithms. And due to its mass appeal and instant updates of real-time events, Twitter in particular is a significant player in this game.

 

In the past, its 140 characters have been monumental in causing havoc in the world’s biggest stock market.

 

In 2013, the official Twitter account of Associated Press news agency was hacked and a false tweet was sent out claiming explosions at the White House injuring President Barack Obama. Within a few minutes , the Dow dropped by 1%, oil prices dropped, the price of gold rose and the market was in a state of utter chaos! All this couldn’t possibly be the result of a few traders on their phones. It was a response of several high speed computers which were programmed to detect keywords such as “White House”, “explosion” and “Obama” that triggered this frenzied selling of stocks and caused instability in the market.

 

Dip in the stock market index after the tweet by Associated Press

Dip in the stock market index after the tweet by Associated Press.

 

In yet another case, on May 2016 there was a gruesome train accident in Maryland and the public incessantly tweeted about it. Within a span of just 90 minutes, the stocks of the transportation company guilty in the case, CSX Corporation, fell by $500 million!

 

In recent times, many companies have taken to Twitter, Facebook and other social media sites to release important announcements and financial data. Algo-traders are consistently refining their algorithms by incorporating phrases related to business acquisitions and mergers, market releases and other related terminology that might affect stock prices.

 

However, like human beings, these machines are also vulnerable to fake news and rumours that can cause losses to the tune of millions of dollars. New features are being tested to scrutinise the data and verify the credibility of the source.

 

Sentiment analysis is another aspect where social media acts as a game changer for Algo-traders. The algorithm gauges public sentiment and opinion about a company or stock based on its mentions in posts, news articles and the number of upvotes and retweets associated with it. In simple words, if the algorithm interprets positive sentiment surrounding a particular company, it will draw traders to purchase the stock and in return increase the stock price. On the other hand, negative public sentiment instils fear in traders and compels them to sell their stocks.

 

There is no doubt about the vast power of social media in the world of finance. While it has sparked some major market fluctuations in the past, it has also significantly helped traders to earn millions by the second. In an era where change is inevitable, it is up to us to shape the way social media influences the future of trading.

 

If we play our cards right to harness the immense potential of social media correctly, the possibilities are endless.

 

(We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)