Can 'Trading on Tweets' Really Make Money?

Social media websites like Twitter and Facebook have become increasingly important to high frequency traders looking to anticipate market moves before they happen, but could they eventually become as significant as traditional business news providers in the world of high speed trading?

Major news and financial information providers such as Bloomberg, Dow Jones and Thomson Reuters already offer services that filter market news from company websites and social networking websites, but experts gave mixed views on whether social networking sites would be seriously used to influence portfolio positioning.

“A lot of news is made around a company via social media, search engines, product evaluation sites, where there’s a lot of information available about companies’ products and that turns into news later on, so if you want to basically find out what will be news tomorrow you have to look at [social media] today,” Peter Van Kleef, Managing Director at Lakeview Capital Market Services told CNBC.com.

However, Van Kleef added, more sophisticated methods of analysis need to be developed before hedge funds and other major players in the European high speed trading world see social networking sites as credible enough to influence portfolio positioning.

“I think for big investors, institutional funds, big money, to believe in [the use of social networking sites as a measure of market sentiment] and see that it’s credible, I think you need more sophisticated analysis, you need platforms and frameworks to be produced where it becomes easier for users of information to actually get to the source of information and actually quantify and qualify that information," he said.

"I think there's general agreement that news is fantastic for trading, atomized news is a good thing, but most people don't actually know how to apply it and here's the key thing: how quickly will people cater to that market and say: 'here, we give you want you need to make sense of it?'"

Identifying 'Time Bombs'

Van Kleef explained that the problem with unconstructed web content via social media sites was that it tended to be abstract, not written by analysts and difficult to classify; but social networking sites like Twitter and Facebook and search engine feeds could help investors identify and manage risk more effectively, he also said.

"[If the technology] is too far off for trading, maybe we would want to look at social media for risk management and say: if we can just find a couple of those time bombs before they go off we can reduce our exposure to them," he said.

However, at a High Frequency Trading World Conference in London, hardly any of the European participants admitted to using social networks seriously to inform investment decisions and portfolio positioning.

“Trading on tweets, I don’t have time for it, there seems to be so much bull**** on the Internet,” Hendrik Klein, CEO of Da Vinci Invest said, summing up a general lack of enthusiasm.

Van Kleef told CNBC.com that he knew of one European hedge fund looking seriously at using social media as a way to track market moves, but Edgar Perez, author of The Speed Traders: An Insider's Look at the New High-Frequency Trading Phenomenon That Is Transforming the Investing World, said he has not come across a trader who had made money from information supplied on social networking sites.

"I would be very interested in seeing cases where people actually made money using information from Twitter. Remember there's a lag there of time and with high frequency trading you want to make sure you connect directly and don't have any third party providers for information," Perez explained.

In his book, Edgar Perez follows six high speed traders and examines how ultra fast trading could develop in the future.

He does not think social networks in their current form will be particularly useful to speed traders due to time lags and the universality of social media websites.

"You're trying to minimize any time between the trade on information you get, therefore I don't think that's going to be an area of potential, but people want to have an advantage and obviously everybody will have access to Twitter, so I'm not sure if you're going to be able to capture any discrepancies relying on that information," he explained.