SEC and FINRA Jointly Issue Warning About Social Sentiment Investment Tools
Social media is here to stay despite news reports about privacy, data leaks, fake news, censorship and other controversies which have surfaced in the last several years. The annual Pew Research Center survey conducted early this year revealed that the share of U.S. adults using social media, including Facebook, remained mostly unchanged since its 2018 survey.1 The 2019 survey pegged Facebook as one of the most widely used social media sites with roughly seven-in-ten U.S. adults using the social media platform, and 73 percent of adults reporting that they use YouTube’s video sharing site.2 An outgrowth of the popularity of social media platforms has been a research area called sentiment analysis or, as it is more commonly termed, opinion mining. This in turn has spawned an offshoot in the investment community — social sentiment investment tools.
The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) recently issued an Investor Bulletin to inform investors about social sentiment investing tools and highlight their risks.
The Investor Bulletin outlines a number of social sentiment investment tools.3 The first of four mentioned in the Bulletin is social media data analysis. It is offered by firms such as Fidelity, which offers it as a stock research tool. Fidelity states that its S-Score, provided by Social Market Analytics, can tap social media to measure the impact of breaking news and provide early warning of potential market moves, which if social media users rate favorably will result in increased stock prices or decreased stock prices if rated unfavorably.4
The second social sentiment investment tool mentioned in the Bulletin is actually social networking platforms which are offered to users by some financial services firms. These social networking platforms give users access to stock-specific social media sentiment information and allow users to share and discuss investment and trading ideas with other investors.
A derivative of this is crowdsourced research and analysis. In this third form of social sentiment investment tools, firms use a website or mobile application to crowdsource ideas and opinions from the public at large or from institutional investors. A trend with these sites, according to the Bulletin, is to provide an “open platform” that allows contributors (such as analysts, investors and academics) to offer crowdsourced earnings estimates.
The fourth social sentiment investment tool cited in the Bulletin is actually direct trading from social media websites or mobile applications, which give users the ability to trade in their brokerage accounts directly from social media platforms or mobile applications.
While it is always tempting to discover a way to gain an edge on the markets, the SEC and FINRA cite potential risks for investors using social sentiment investing tools. First, the information may not be accurate or complete or even timely, as it may contain old chatter or retweets. In an effort to manipulate stock prices, the posts can spread false or misleading information. Finally, real-time discussion platforms and buy/sell indicators driven by social sentiment may lead investors to make emotionally-driven or impulsive decisions according to the Investor Bulletin.5
To avoid the potential risks, the SEC and FINRA recommend the following:
• Use other types of investment analysis, including fundamental value metrics, to make investment decisions. Don’t rely solely on social sentiment investing tools.
• Learn all about the social sentiment investing tool you are relying on by investigating how the tool collects and analyzes data, and what risks or conflicts of interest may exist with the tool (e.g., incentives from issuers or third-parties to promote a particular security).
• Keep in mind that information from social sentiment investing tools is time limited, or short-term in nature. You should have implemented a long-term financial plan which will help guide you and insulate you against making emotional decisions which can affect your long-term financial objectives.
• Monitor the performance of the investments you make using social sentiment investment tools and track how those investments perform against major market or sector indices.
As with any investment tool, if investors take the time to educate themselves, thoroughly understanding the upside and the downside of any tool they use, they can be confident they are making wise investment decisions.
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1, 2 Share of U.S. Adults Using Social Media, including Facebook, is mostly unchanged since 2018, by Andrew Perrin and Monica Anderson, www.PewResearch.org, April 10, 2019
3, 5 Investor Bulletin: Social Sentiment Investing Tools – Think Twice Before Trading Based on Social Media, April 3, 2019
4 Applying Social Sentiment to Your Stock Research: See how social media may be able to assist you in making investment decisions, www.Fidelity.com