THE MEDIA’S ROLE has traditionally been to report on newsworthy events; they don’t aim to be part of the news themselves. However, in the case of the financial media, at least, that division is becoming increasingly hard to sustain. In this edition of The Analyst, we delve into the issue of the media’s influence on financial markets, with a particular focus on the impact of rapidly expanding social media platforms.

Rochester Cahan, Head of U.S. Quantitative Strategy at Deutsche Bank, recently outlined his own research into the impact of media on markets. His conclusions drew a clear distinction between the influence of traditional news media, which consists of mostly factual reporting of items such as quarterly earnings, and social media information, which largely consists of opinions, commentary, and customer feedback on a company’s products and overall stature. Interestingly, Mr. Cahan’s research found that social media information has twice the predictive power of traditional news for longer horizon investment strategies.

This is not surprising when one considers that social media is increasingly being viewed as a barometer for thoughts and ideas about virtually every aspect of the world. This collective pulse of observations, wisdom, and emotional reactions opens up a whole new world for asset managers, equity analysts, and traders to analyze and quantify.

Perhaps predictably, the earliest adopters of social data analytics in finance were hedge funds and high-frequency traders. However, the power of social media has begun to capture the broader public’s attention after a number of notable events in 2013, including:

• The U.S. Securities and Exchange Commission confirmation that companies could use social media outlets to announce key information in compliance with its Fair Disclosure Regulation
• The Associated Press Twitter account was hacked, and fraudulent tweets were released about explosions at the White House, which drove the Dow down 140 points in two minutes (commonly referred to as the “Hash Crash”)
• U.S. investor and business man Carl Icahn released a tweet that read: “We currently have a large position in Apple. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come.” This tweet quickly caused Apple’s stock price to jump, adding $12.5 billion to the company’s market value

The really interesting question about social media and markets is: Where do things go from here? The last twelve months have seen Bloomberg and Thomson Reuters add or expand social media data monitoring and analytics tools to their professional workstations, which has inspired investors to explore new approaches to capturing alpha from social data and the thousands of microevents that go unnoticed every day. Perhaps the next great revolution in financial analysis is just around the corner?