December 02, 2011

While asset managers have traditionally used social media as a sentiment indicator to gauge people's positive or negative feelings about a particular issue or company, they are now increasingly also using breaking news culled from Twitter and other social media feeds for their algorithms, and trading on it.

It is multi-billion dollar hedge funds and other large, traditional asset managers, rather than start-ups that are driving the trend, says Seth McGuire, director of asset management and financial technology, Gnip.

One of the latest indicators of Twitter's worth as a news feed - and not just as a channel for idle gossip - was Osama Bin Laden's death.

Keith Urbahn, the former chief of staff for Don Rumsefeld, is widely credited with the breaking that story through Twitter . The story was rapidly re-tweeted, and within 19 tweets, a company called DataMinr had identified this as an important and breaking story. DataMinr then sent an alert about the news to their clients, including hedge funds, McGuire explains

Ultimately, news of Bin Laden's death broke on Twitter a full 20 minutes before the story appeared on traditional news sites and TV networks, so that traders and investors were able to feed the information into their algos and act on it within just few minutes.

With market volatility at record levels, it makes sense for firms to aggregate data from various countries and use it to as an additional indicator to trade currencies or equities, McGuire points out. Tweets about the euro crisis for example can also capture the mood of the market in the U.S., he explains.

As for concerns that breaking news on Twitter sometimes isn't reliable enough to act on, McGuire counters criticism by saying the truth often lies in the numbers, and a close look at who is "retweeting" the news.

In other words, if a large enough number of people are tweeting the news, it is more likely to be true. "You see a greater rate of retweets repurposed when it's true. It's a crowd sourcing exercise," says McGuire. (Although I think any news on Twitter should initially be taken with a grain of salt as any one tweet can spread incredibly quickly).

But equally important, says McGuire, is to see who is retweeting the news. "People retweet content from users they trust," he says.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in ...