On Monday, DCM Capital, a small and virtually unknown London-based trading house, is set to launch a bold, and potentially risky, platform for retail customers which claims to give users the ability to translate social media sentiment into investible trading signals.
Behind the platform is an algorithm developed and deployed in 2011 for a small hedge fund called Derwent Capital Markets. Its founder Paul Hawtin, a young entrepreneur-turned financial strategist based in London, claimed to have found the secret sauce behind using social media to predict market swings.
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Derwent Capital Markets opened for business in July of 2011, and with just $40 million in assets, it didn't last long, closing just one month later.
Despite the lack of investor interest in the fund, it did eke out a respectable 1.9 percent gain in the time it was open, outpacing broader markets and many hedge funds over that span.
"We hit August [of 2011] which was a disastrous month with the US losing its triple-A rating and we couldn't raise sufficient capital for the fund to continue," Hawtin told CNBC. "But the underlying technology for the fund was still there."
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So, after over a year in development—and a lengthy regulatory review which Hawtin says the new platform has cleared in the UK—DCM Capital will begin marketing its 'DCM Dealer' platform to retail investors in Europe.
In press materials prepared for the launch, the platform is described as a tool which "mines and analyses data produced by Twitter, Facebook and other social media channels, equipping users with an additional layer of intelligence when making trading decisions."
And here's how it works: the platform will troll social media and assign a sentiment score between 0 and 100 for a particular financial instrument (0 means there's a very negative attitude towards the market in question, 100 a very positive attitude). Based on his prior research, which was spearheaded by University of Indiana studies, those sentiments can sometimes be a leading indicator ahead of certain market moves.
But to be fair, Hawtin is quick to admit that the data being provided carries with it buyer-beware risks.
"This is not some kind of holy grail of buy-sell signals that's guaranteed to make you money," Hawtin explains. "This is an additional layer of market information…markets are driven by greed and fear, so if you can understand fear and quantify it in real-time, you could use that to protect yourself."
Whether or not investors buy in to the platform remains a major question, made more pointed by Hawtin's extremely fleeting track record.
But still, Hawtin is hopeful this launch will be greeted with a much warmer reception than his short-lived hedge fund, and is aiming to sign up about 3,000 retail clients within the first year, and at some point, make inroads into US markets.