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Did You Hear That Tweet, Wall Street?

Almost every user of social media like Facebook and Twitter knows that information they post online will be read by someone else, and might even be repeated to others. But what if the social media user was someone in the financial industry or a giant corporation announcing a strategic move or product development, and the person reading it was a financial services firm? Over 500 million tweets a day appear on Twitter. Some are posted by notable investors like Carl Icahn, while others are by analysts discussing stocks. ((William Alden, Separating the Market-Moving Tweets From the Chaff, N.Y. Times DealBook (Nov. 11, 2013, 7:29 AM), http://dealbook.nytimes.com/2013/11/11/separating-the-market-moving-tweets-from-the-chaff/.)) The practice of monitoring these messages for financial information began years ago, but only recently has the financial world begun to notice the usefulness of such information and a new industry of social media analysts has arisen. ((Id.))

In Fe bruary, a start-up in this new industry named Eagle Alpha received $1.5 million in investment funding from thirteen new investors. ((William Alden, Start-Up That Analyzes Twitter for Wall Street Raises Financing, N.Y. Times DealBook (Feb. 27, 2014, 5:22 PM), http://dealbook.nytimes.com/2014/02/27/start-up-that-analyzes-twitter-for-wall-street-raises-financing/.)) The start-up’s founder and CEO stated “[he] wanted checks from people who were connected on Wall Street or the City of London.” ((Id.)) Eagle Alpha operates in both New York and London. ((Id.)) Guglielmo Sartori di Borgoricco, a senior executive at Barclays from 2004 until 2012, is among the various bank and hedge fund executives investing in Eagle Alpha. ((Id.)) Mr. Sartori di Borgoricco commented that “[he] believe[s] Eagle Alpha has developed a model which delivers significant competitive advantage to its clients in a way we’ve never seen before.” ((Id.)) Unlike much of its competition, Eagle Alpha uses a combination of people and technology to analyze the Internet, rather than just algorithms. ((Id.)) Some of the “insightful” information Eagle Alpha self-describes itself as identifying includes “marking-moving information, unique color and longer-term information.” ((Eagle Alpha, http://eaglealpha.com (last visited Mar. 2014).)) It offers three different products to its clients, who are mostly hedge funds and investment banks, including a read-only Twitter feed aimed at hedge fund clients and a service that identifies important users and interesting posts to Twitter called Social Sonar. ((Alden, supra note 3.)) The firm also offers free insights on topics such as stocks in the United States and the United Kingdom to anyone who signs up on the firm’s website. ((Eagle Alpha, supra note 9.))

Other start-ups either assembling social media information for their own investment use or to sell to financial firms have experienced mixed success over the past few years. One notable flop was the London-based hedge fund Derwent Capital Markets, which was established in 2011 to trade on Twitter trends and closed within a month. ((Alden, supra note 1.)) Derwent had been influenced by the writings of Johan Bollen, an associate professor at Indiana University, the school from which Derwent licensed the software it used. ((Id.)) Bollen wrote a 2010 paper contending “that an analysis of Twitter data could predict the Dow Jones industrial average with 87.6 percent accuracy.” ((Id.)) His own start-up measures the collective mood of the entire market, rather than that regarding a specific stock, based on Twitter posts. ((Id.)) Other start-ups, however, have been more successful and the industry is beginning to see action by even bigger players such as the New York Stock Exchange and Bloomberg LP. ((Id.))

Perhaps more interesting and important, however, is that social media announcements have caught the attention of the Securities and Exchange Commission. ((Id.)) In April of 2013, the SEC released disclosure rules pertaining to social media posts that allow companies to make announcements via such posts, but only if their investors are informed of which social media outlets may be used for such announcements. ((Michael J. De La Merced, S.E.C. Sets Rules for Disclosures Using Social Media, N.Y. Times DealBook (Apr. 2, 2013, 8:34 PM), http://dealbook.nytimes.com/2013/04/02/s-e-c-clears-social-media-for-corporate-announcements/.)) The new disclosure rules arose from an investigation into an announcement made by the CEO of Netflix posted to his personal Facebook page, which the SEC originally believed may have violated Regulation Fair Disclosure. ((Id.)) Regulation FD, as it is known, is “intended to ensure that all investors have the ability to gain access to material information at the same time.” ((Press Release, SEC, SEC Says Social Media OK for Company Announcement if Investors Are Alerted (Apr. 2, 2013), http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171513574#.UyHsjf2bMdt.)) The Acting Director of the SEC’s Division of Enforcement commented that “[o]ne set of shareholders should not be able to get a jump on other shareholders just because the company is selectively disclosing important information.” ((Id.)) The SEC ultimately chose to issue a report of investigation instead of sanctioning Netflix’s CEO, but social media services have since arisen attempting to alleviate the risks of the Netflix debacle. ((Id.)) Eagle Alpha’s Social Sonar service has been described as a “compliance-friendly version of Twitter” because it only reposts tweets of corporate executives and government officials and does not allow direct posts by stock traders. ((Id.))

The response of the market to the Netflix CEO’s post and Netflix’s response to the SEC’s original claims signify the importance that social media analysis may play to financial firms. Netflix’s stock price had increased $11.27 by the close of trading the day following the CEO’s Facebook post. ((SEC, supra note 20.)) Furthermore, in response to the SEC’s concerns, the company’s CEO wrote that “[Netflix] use[s] blogging and social media . . . to communicate effectively with the public and [its] members.” ((Id.)) This type of corporate use means that such analytical services may be crucial for financial firms like Goldman Sachs that prohibit and block their employees from accessing social media sites at work. ((Alden, supra note 1.)) Furthermore, investment firms have made effective use of social media posts in the past to either avoid losses or make gains on some of their investments. Social Market Analytics, a start-up partnering with the NYSE, was responsible for informing its subscribers of “unusually positive sentiment” regarding Apple stock before Carl Icahn publicly announced his sizable acquisition of Apple stock. ((Id.)) That public announcement, by the way, came via Icahn’s Twitter. ((Id.)) Another anonymous hedge fund trader commented that start-up Dataminr alerted his firm of the Boston Marathon bombings before they even appeared on TV, helping the firm avoid losses as the market responded in the wake of the tragedy. ((Id.))

It is readily apparent that social media is playing an increasingly important and crucial role in the lives of its private users, but the effectiveness of evaluating the posts of these users and collecting data about posts by corporate and financial users is still difficult to determine. While there are successes like Social Market Analysis’s information regarding positive trading in Apple, there are also utter failures like Derwent Capital Markets. On the academic side, some computing experts believe that it is not yet possible to reliably trade on messages posted to Twitter. ((See Alden, supra note 1.)) It is almost certain, however, that as social media continues to grow in importance and more companies begin to disseminate information via social media outlets the opportunity to gather useful investment information surely will exist, even if it does not fully exist right now.

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Ethan Anderson

Vol. 3 Associate Editor
University of Michigan JD Candidate, 2015 Northeastern University BS in Economics, 2012

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