Social media networks are now “critical communications channels and sources of real-time data” for investment managers, presenting myriad opportunities – and potentially huge risks – to firms, and dramatically reshaping the way they trade portfolios, build investment ideas and communicate with clients, according to a major new study by SEI.
In a wide-ranging paper, titled ‘Twitterisation 2.0: The Exponential Pull of Innovation’, SEI gauges the evolving role of social media platforms across financial services.
The report reflects on social media’s broader impact, touching on compliance concerns, privacy challenges, the reputational risks stemming from poorly-worded tweets going viral, public shaming, the drawbacks of echo chambers; and the risk of personal data leaks.
It also weighs up how portfolio monitoring and trading, marketing and communications, trading, and risk analysis, among other things, are all being shaken up by the rise of social networks.
‘Twitterisation’ is one of several emerging trends driving innovation in the asset management industry – along with Watsonisation, Googlisation, Amazonisation and Uberisation – which are being explored by SEI in a series of white papers.
Specifically, it describes the ways in which technology and social media is transforming how businesses communicate and interact with, and learn from, their customers, in acknowledgement that corporate communication is no longer a one-way street.
“Despite historic hesitancy on the part of many asset managers, driven in large by regulatory concerns, social networks play an increasingly pivotal role in the industry,” SEI’s study observed.
The paper also considers how hedge fund firms’ pioneering use of data analytics tools to examine social media metrics and develop investment ideas has since spread to become part of mainstream financial services firms’ models.
SEI observed how Twitter – whose users generate some 350,000 tweets every minute - had already “fomented political uprisings, broken national news, moved elections, aided diplomacy, fuelled consumer movements, lifted brands, facilitated disaster response, and propelled careers”, and acknowledged how former US president Donald Trump had utilised the platform to amplify his message.
But it noted that while social media has proved a “potent tool” for major consumer brands such as Nike, Coca-Cola and Starbucks in building their global profile, asset managers in contrast have been “late to the party”.
Underlining this point, SEI pointed to certain compliance concerns and resource constraints which have kept many asset managers and investors from carving out a presence on widely-used platforms such as Twitter, Facebook, Instagram, and YouTube – with LinkedIn being an exception.
“The promise of networking caused vast numbers of professionals to sign up, and companies seized the opportunity to showcase their thought leadership as the site grew beyond its original role,” SEI said of Linkedin. “Positioned for business rather than pleasure from the very beginning, it is now the social network of choice for asset managers and wealth managers.”
While discussions have centred mainly around the marketing and distribution capabilities of social media, and its ability to amplify a user’s profile – Goldman Sachs now boasts 815,000 Twitter followers, while Warren Buffett has some 1.7 million followers – SEI also delved into how investment firms are increasingly using social networks to inform investment allocations and securities selection through the use of data tools.
Initially used by hedge funds – which could afford the then-expensive tools – in order to leverage short-term information for arbitrage trades, social sentiment tools have since spread, and are now commonplace among traditional investment managers, private equity firms, banks, exchanges, and brokers.
“In an investment context, social media is primarily being used to detect, gauge, and validate sentiment,” SEI wrote. “As markets become more efficient, the real-time assessment of crowd psychology is increasingly viewed as an area where better tools and analytical firepower can make a meaningful difference.”
The report found that investment management companies are “increasingly well served” by data and analytics firms that “reduce the amount of heavy lifting” required of internal staff. It pointed to companies such as 7Park Data, Accern, Alexandria Technology and Sentifi which each offer services that help investors get to grips with real-time information flows across alternative and traditional market data, as well as textual sources such as tweets and blogs.
Along with risk management and analytics, third-party analytics providers have also sought to help clients unpack investor and market sentiment using social data.
The study highlighted how companies such as MarketPsych, which collaborated with Thomson Reuters, have attempted to map financial sentiment using news and social media outlets, having built indices tracking emotions such as fear, optimism, and confusion.
It also acknowledged the increasingly important role played by the likes of Robinhood and eToro among millennials who have started trading a range of assets including stocks and commodities.
The paper warned that a failure to devote sufficient resources to a company’s social presence is a key risk in a world “where many financial brands are facing an erosion of awareness and trust.”
“Concerns over compliance and resource allocation have kept some firms away from social media altogether, but they can also perpetuate half-hearted efforts,” SEI said.
It added: “Less common is the integration of social networks into the investment process itself, usually as a source of sentiment data. Social networks doubling as trading platforms are the most recent innovation.
“As social networks continue to evolve, financial firms will attempt to leverage them in new ways, possibly combining multiple approaches.”
While the institutional side may remain resistant to change, SEI’s study predicted “radical experimentation” on the retail side, with social media “tightly and inextricably” woven into business models, with investors, products, and clients all linked via real-time platforms.
“Once dismissed as a trivial pastime, there is no disputing the fact it is now far more,” the study said. “As critical communications channels and sources of real-time data, social networks present myriad opportunities to asset management firms who are willing to engage.”
Click to read online or download the SEI white paper – The Exponential Pull of Innovation: Twitterisation 2.0 – UK version or US version.