There have been a long line of companies set up based on the ability to use Twitter Inc. (TWTR) to predict the direction of the stock market, and to even forecast the ups and downs of individual stocks. Most have died, or at least slipped into obscurity. However, as the markets surge and the danger of a rapid and terrible sell-off thus becomes greater, Twitter may get another chance at the role as a tool for Wall Street research. However, the results of predictions will have to be very successful and, therefore, become mainstream.
Among the companies that have pitched social media as a way to read the markets, and in particular Twitter, are several that had a period in which their services appeared valuable. MarketPsych was among these. So was Derwent Capital Markets, which licensed technology to mine tweets as stock market predictors. Dataminr likely has been the most successful of the social network financial market tracking firms because, aside from other things, it has access to the Twitter Firehose of public tweets. So far, it has claimed the high ground in the news and social media prediction process.
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The fact of the matter is that traditional technical analysis, traditional research of sectors and companies, macroeconomic research and reactions to earnings and mainstream company news have continued to be the means by which almost all equities and equity indices are traded. Old indicators like same-store sales, oil prices, Federal Reserve data and smartphone unit sales have not been replaced by an analysis of Twitter, or any other social media for that matter.
The Twitter analysis business has been plagued by a few things so far. The first and most important of these is that no company in the social media prediction business has been able to present Wall Street with a model that outdoes the old ones, or at least matches them on any scale. If that had happened, investors would flood this company with requests -- and revenue. Another reason is that many financiers believe they can read Twitter reactions without help. The news of an unsuccessful sale of new J.C. Penney bonds gets tweeted by hundreds of people and investment companies, many of them attached to tradition media outlets and research operations. Tweets are completely naked insofar as interpreting them is concerned, or at least that is what almost everyone who participates in the market believes.
But as the technology of tracking and prediction of markets by social network interpretation becomes ever more advanced, one company or university professor trying to open the lock may be successful. If that happens, the reason people and institutions trade will change, perhaps radically. Based on what Twitter has done to the dissemination of news and other information, who is to say the stock market will not be next?
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