Social Media And The Stock Market?

flash crash stock market and social mediaHe who has the information has always been the king of the stock market. But what does that mean when information travels around the world at the speed of light? It means that information is much easier to access by anyone, more easily to utilize, and, finally, it means information can make or break certain stocks or even the entire market itself. Recent examples have shown how a simple tweet can bring down the Dow Jones by 150 points, or a tweet on Apple can increase its share price 5%. So what is the effect social media is having on stock markets these days?

The Twitter Bump

Much like the ‘Colbert Bump,’ where candidates running for office experience a surge in the polls when they are featured or mentioned on the Colbert Report, many companies have experienced surges after simply having trended on Twitter. Take Apple, for example. When billionaire Carl Icahn tweeted about Apple in his portfolio, Apple shares increased by 5% and continued to surge for a day. This is interesting because share prices are theoretically determined by the market’s perceptions of the future cash flows of the company – and theoretically, a tweet or two should not change the future cash flows of a company. Still, the key is that it certainly changes the perception.

Companies on Social Media

Corporations have long used social media to reach their customer base, but just recently, the SEC clarified a rule indicating that publicly traded corporations can use social media outlets like Facebook and Twitter to communicate important investment and share related information to their investors, as long as the investors were made aware of which social media outlets would be used. This means that such tweets about share buy-backs and dividends can become the norm in how that information is communicated to investors – with a tiny URL explaining the details, of course. However, that means that market-shaking news can blast through the Twittersphere and have real financial market effects.

Leveraging Social Media for Speculation

Because Twitter and Facebook are effectively immense repositories of global psyche, or Zeitgeist, being able to leverage them in determining what a share price should be in 26comparison to what it is can provide a lot of income to those who do it right. Companies have begun developing algorithms that machine-read social media like Twitter and use that data to predict what future values of companies may be. It is known that trending tweets can bump a stock price up or down, but to what extent those bumps can be understood and predicted for financial gain remains to be seen.

Speculation is easy when you know the future – but knowing what information available now will mean in the future is more difficult. Humans do this all the time in offering options, like covered calls through online providers like compoundstockearnings.com, but the ability to automate this with machines is where big money is often made – while adding absolutely no value.

Volatility

Because automated systems now control an immense amount of financial speculation on the markets, mass movements on social media can have damaging effects on the financial markets in real terms. The Hash Crash – when the Associated Press’s Twitter account was hacked – resulted in a 150 point drop in the Dow Jones, effectively vanishing $136 billion from the market. Fortunately, it bounced back the same day, but things like the Hash Crash and as well the Flash Crash of 2010 have shown that the high-frequency automated systems combined with the whims of users can have a real and volatile effect on social media.

The future of social media’s role in the stock market remains to be seen. It is clear that it has a real effect on markets already, but how speculators and regulators alike will react to its power in the future is as predictable as next week’s Apple price.

Jeremie Brenton is a freelance economic consulting blogger who is also reguarly covering technology and green tecnhology.