Social media has become such a ubiquitous part of everyday life that it is hard to believe that the first networks were only created 10 years ago. It sounds incredible but Twitter (TWTR:NYSE) now has 241 million monthly active users, while Facebook (FB.:NDQ) has more than 1.3 billion.
The emergence of these sorts of services has changed the way we do things including how we view the financial markets. Nowadays you can see what the experts think about the latest news almost as soon as it happens and if you want you can have a public discussion about it.
Market analysts and other respected commentators are able to quickly share their views and those following them can react accordingly. You can even take it a step further and use a copy trading service to directly replicate what others are doing straight into your account.
Most listed companies view social media as an important communication channel. This enables ordinary shareholders to keep up to date, while high profile activist investors can publicly challenge the board and their policies.
- Tweet smell of success – keeping up to date using Twitter
When Twitter floated on the New York Stock Exchange last November its shares soared in value making it the second largest internet IPO in US history. The only company ahead of it is its fellow social media giant, Facebook, whose initial listing gave it a market cap of $104 billion.
According to its latest earnings announcement, Twitter now has an average of 241 million active users a month. Anyone with an account can post their thoughts more or less as they happen and follow the views and activities of whoever they want.
Josh Raymond, chief market strategist at City Index, says that there is a lot of noise on Twitter and because of this he wouldn’t recommend using it to copy the trading strategies of others.
‘I think it is an excellent way of connecting with other like-minded traders and getting instant information in a digestible way, sometimes before it has even been publicised in the markets. That can give you a vital edge.’
Raymond recommends following his colleague, City Index’s chief global strategist Ashraf Laidi (@alaidi) for foreign exchange and macroeconomic news and analysis. He also follows other less well-known brands such as Kantar Worldpanel (@KWP_UK) to get updates on specific sectors.
Rolling news schedule
Twitter has become such a normal part of everyday life that even august institutions like the Bank of England (BoE), the Federal Reserve and the International Monetary Fund use it. The 140 character rule ensures each Tweet is short and to the point, but there is always the scope to add a link to more detailed information.
Michael Hewson, chief market analyst at CMC Markets, says that he follows the main news feeds such as Bloomberg, Reuters and CNBC, as well as eminent economists like Andrew Sentance (@asentance) who used to sit on the BoE’s Monetary Policy Committee.
‘It all depends what is topical at the time,’ says Hewson. ‘It can really help to follow local people who are on the ground as they can give a first-hand impression of what is happening.’
In the know
Most publicly listed companies use Twitter to keep in touch with customers, suppliers and investors. It has become so widespread that it is perfectly feasible to use it instead or alongside of a traditional news feed.
‘I think Twitter is an excellent and valuable source for breaking news. Instead of paying lots of money to sign up to RSS feeds from suppliers, if you follow the right people on Twitter, you will get the same information just as quick and for free. Moreover, there are times when news breaks on Twitter and the market reacts afterwards as opposed to the other way around so Twitter can sometimes give you an edge,’ explains City Index’s Raymond.
- Follow the leader – the growth of copy trading
The days of trading being a secretive and isolating experience are long gone thanks to the creation of specialist social networks like ZuluTrade, Currensee and eToro. These are similar in concept to Facebook except that they are focused specifically on traders.
All these trading networks tend to focus mainly on the currency markets. The basic idea is that users can share their views and trades in real-time, thereby enabling them to benefit from the collective insight.
Most also go a step further and offer some form of copy trading feature that allows you to automatically replicate the trades of successful users directly into your account. This enables beginners to benefit from the experience of others, while the more established traders receive recognition and in some cases an extra source of revenue from the network providers.
Nadav Avidan from eToro, says that copy trading is based on real people, investing their own real money in their own real portfolios. ‘Nowadays, people are willing to share their actions and strategies with all other members of the community. By sharing that knowledge, all members help each other to create a more profitable eco-system for investments, while keeping their own personal benefits at the heart of their decisions.’
The Cyprus based company eToro claims to be the world’s largest social investment network with three million users spread across 200 different countries. Last year it passed the milestone of 50 million trades, of which 64% were replicated using its Copy Trader feature.
‘Recent research we did with MIT has proved that social trading is more profitable than manual trading. When looking at our data, from January 2012 until today, social traders closed 26% more positions in profit than manual traders on our platform,’ explains Avidan.
eToro enables users to create a people-based portfolio where they allocate funds to replicate the trades of others. At the time of writing the most widely followed members of its network had between 1,000 and 6,400 people copying their every move. As you would expect the majority of them have made decent gains and tend to be profitable more weeks than not.
‘Right now we have about 5,000 traders that are being copied,’ explains Avidan. ‘Some of them are being copied by a single digit number of traders, while others are copied by thousands. All those who take part in our Popular Investors program can get an incentive of up to $10,000 per month, based on the number of copiers they have, as well as their performance.’
FxPro has taken a rather different approach. The company’s SuperTrader platform provides access to 10 approved trading strategies. Five have been developed in-house, whereas the others have been provided by third parties, but they are all rigorously tested and monitored to make sure they perform in line with expectations. Angus Campbell, a senior analyst at the company, says that the two best performing strategies are both from third-parties and are up 54% and 39% respectively.
‘We strictly vet all the strategies by back, forward and stress-testing them, with third-party providers going through a stringent interview process on top of this,’ explains Campbell. ‘Until we are 100% satisfied with the performance, risk management and trading methodology exhibited throughout these tests we will not take a strategy live.’
So far they have had over 300 third-party providers approach them, but have only put a dozen live, having removed some of them following deviations in their risk management.
Clients can monitor a strategy by adding it to their watchlist or they can copy it to their account so that it will automatically replicate the trades at the size they want and subject to whatever risk management controls they put in place.
‘Before starting an investment in any strategy, a client needs to set a maximum loss percentage as well as a trailing stop percentage to possibly lock-in profits. Clients also have extra control in that they can start and stop allocations to strategies as they wish, and close any individual open trade should they want to,’ explains Campbell.
The platform is completely transparent and allows you to see the detailed performance statistics together with the strategy’s rating, maximum drawdown and average weekly return. There are no additional charges for using SuperTrader other than the performance-related fee that is available to the third-party strategy providers.
The UK regulator, the Financial Conduct Authority (FCA), is currently investigating whether copy trading is a form of discretionary portfolio management. This is where a client hands over control of their account to a third-party who makes all the buying and selling decisions.
Its intervention could mean that the various providers will have to get permission from their national regulators to operate as investment managers, as this sort of advisory activity requires a different level of authorisation than a normal execution-only service. eToro welcomes the FCA’s interest in copy trading because, it says, the move reflects the impact that social media has made on the traditional ways in which financial services are delivered to the retail consumer.
‘We look forward to co-operating with the FCA to ensure a safe and trusted environment for copy traders around the world. We are proud to be authorised in the UK which is rapidly becoming the leading centre for financial innovation,’ says Avidan.
The latest broker to incorporate social media into its trading platform is Saxo Bank. Its new service, TradingFloor.com, has been dubbed ‘Facebook for traders’ and enables users to interact with each other and see their trades and performance.
Rune Bech, head of digital at the company, says that TradingFloor.com enables clients to connect their trading activity to their profiles so that they can show what they are trading and view other traders’ activity instead of just writing and reading about it.
‘TradingFloor.com is an investment and trading solution for the social media age,’ explains Bech. ‘Users value the opportunity to connect with traders from around the world with whom they would otherwise have no access or dialogue.’
One of the main developments in the pipeline is a feature that will enable traders to automatically replicate the trades placed by other users whose strategies they want to copy. Bech continues: ‘Transparency is one of the fundamental drivers behind the concept of TradingFloor.com, so all traders have an online public profile, there is complete clarity around their investment picks and performance, and users can get inspiration from or share ideas with peers rather than paid professionals.’
City Index is currently finalising a new social trading platform called Connect. The idea is to allow clients to directly engage with other like-minded traders, to see what they are up to and learn their strategies. There is also a copy trader feature for those that want it.
‘Connect is our social trading platform that connects our client base so that they can see what others are trading in real-time and can communicate their views and opinions. It is currently in beta stage but we hope to fully launch it soon to our entire client base,’ explains Raymond.
With all the information in the open anyone who chooses to replicate the trades of others can undertake their own due diligence and assess the capabilities of other traders in the same way as they would a traditional fund manager.
- Companies reporting on social media
Companies use social media in a variety of ways. Most have a Facebook page and Twitter account to keep in close contact with their customers, suppliers and other interested parties. These can be extremely valuable because it makes it easy to see what people are saying about them, although negative feedback can be highly damaging to their reputation.
Social media is also becoming an important way to communicate with investors. Last year the Securities and Exchange Commission in America gave permission for companies to use these services to distribute their regulatory news, as long as they told shareholders in advance which sites they were going to use.
The decision prompted Warren Buffett, the 82-year old billionaire investment guru to open a Twitter account (@WarrenBuffett). He has only made five tweets in 10 months but has over 800,000 people following him and no doubt hoping for a few pearls of wisdom. Many publicly listed companies publish investor information such as presentations, results and videos on their YouTube, Facebook and Twitter pages in the same way as they do on their corporate website.
Danny Cox, head of financial planning at Hargreaves Lansdown (HL.) says that there are strict rules on how price sensitive information can be released and in the UK these all have to be done via a Regulatory News Service. He says: ‘Social media should be treated as an additional way that investors may be able to obtain information about a company. They should also be aware that there is a huge amount of disinformation on the likes of Twitter, so nothing should be taken at face value.’
A recent survey of institutional investors by AMO found that traditional newswires are still the most important source of company information because of their frequency of use and reliability. The next best option is corporate websites, with social media seen as growing in importance but ranking very low in trust.
In the UK, 40% of institutional investors consult social media websites frequently and another 10% very frequently. About a third ranked this information as usually reliable, although nobody believed that it was infallible.
- Immediate insight and analysis
Given the vast amount of information available online, social media provides a vital role in prioritising data, says The Share Centre spokeswoman Stephanie Reynolds.
‘It shows breaking news, provides commentary on the market as it happens and indicates topical stories,’ says Reynolds. ‘Investors should follow media outlets, influential commentators and industry experts, as well as the company accounts that they invest in or are interested in.’
The most influential sources include: media outlets such as the Financial Times finance news (@FTfinancenews), MotleyFool (@themotleyfool) and Shares (@Sharesmag); personal finance journalists like Paul Lewis from the BBC (@Paullewismoney) and the Daily Mail’s Holly Black (@hollyblack_ltc); as well as Independent Financial Advisers of the quality of Martin Bamford (@martinbamford) and Pete Matthew (@petematthew).
Reynolds says that at The Share Centre they use social media to engage with customers and provide them with information, tools and guidance to support them in making their investment decisions.
‘We share articles on key industry and market events and current topical issues. We also give insight into what other investors are doing by sharing popular investments amongst our customers and interesting stats about their activity.’
The ones to watch
If you want to keep an eye on what’s moving the markets there are various social media sites that can provide a useful insight. One example is the FT Alphaville blog from the Financial Times, which is updated regularly throughout the day with news and commentary. Another good option is the Twitter page @thisismoney, which has up-to-date views on events with links to articles and interviews.
Investors who want to monitor the latest economic news could join the 90,000 or so people following Stephanie Flanders (@MyStephanomics). She used to be the economics editor at the BBC, but is now chief market strategist for UK and Europe at JPMorgan Asset Management. Alternatively you could look at @MarkitEconomics.
Another widely followed Twitter account is that of Chris Adams (@chrisadamsmkts), the markets editor of the Financial Times, whose Tweets are a great way of keeping up to date with the most important developments. Those more interested in stock-specific news could follow Paul Kavanagh (@KavanaghKillik), a partner at Killik & Co.
Adrian Lowcock, a senior investment manager at Hargreaves Lansdown, has around 1,000 people following his Twitter account @AdrianLowcock. His tweets cover funds and equities with links to various interesting stories elsewhere in the media.
‘My followers are a mixture of journalists, competitors, industry peers and clients,’ says Lowcock. ‘It is therefore important to make sure you speak effectively to a broad audience. In this case Twitter is no different to any other form of recorded communication, it’s just that the reaction to any information or comment can be very quick.’
A double-edged sword – the rise of activist investors
Social media has created the perfect platform for activist investors to publicly challenge company policy. These messages can often have a huge impact on the share prices before they are picked up on the main newswires.
One of the best known protagonists is the billionaire Carl Icahn, who loves to challenge the management of businesses in which he has a significant stake. His public battles have included an attempt to force Apple (AAPL:NDQ) to make better use of its cashpile, opposition to the plan by Dell to go private and an effort to encourage the breakup of Time Warner(TWX:NYSE). You can join the 159,000 people following him on @Carl_C_Icahn.
Another example is the hedge fund manager and founder of Greenlight Capital, David Einhorn. He can be quite entertaining and outspoken but you need to be careful if you are planning to follow him on @Davidein because he has been targeted by fraudsters trying to impersonate him. The same thing has also happened with the billionaire investor David Tepper, which shows how risky it can be to pay too much heed to announcements outside of a regulated news source.
In the mood
An academic paper written in 2010 suggested that an analysis of millions of Tweets could enable you to gauge the prevailing sentiment towards specific markets and offer a reliable leading indicator of the subsequent price action. The research inspired a number of specialist information providers to create algorithms to filter out the key data from all the main social media networks and blogs.
It all sounds intriguing but the only dedicated ‘Twitter’ hedge fund shut down after just one month’s trading. Derwent Capital Markets’ Absolute Return fund analysed Tweets and messages on Facebook and other social media sites to create a measure of sentiment for stocks, indices and commodities. The reason for the early closure was because one of the fund’s largest investors thought it would be better to sell the signals rather than trade them direct. They are now available in the form of managed trading accounts via the investment management firm Cayman Atlantic.
Written by Nick Sudbury, an experienced financial journalist and trader/investor who has worked both as a fund manager and as a consultant to the industry. He has an MBA and is also a qualified accountant.