Social media posts can have hidden agendas, regulators said.
The Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. are warning investors about using social media data to make investment decisions.
In recent years, companies like TickerTags, Social Market Analytics and LikeFolio have launched to turn the massive amounts of data on social media into investment research. The idea is that by aggregating and analyzing posts on Twitter, Facebook and others, one can detect a “social sentiment” that predicts future market or economic performance.
For example, if millions of people are tweeting how much they hate the latest iPhone, it could predict Apple falling short on its next earnings report.
Social sentiment data is increasingly popular among both retail and institutional investors. Several companies are providing earnings predictions to individual investors directly, and is selling data to quantitative fund managers.
But the SEC and FINRA said the information on these tools can be inaccurate, incomplete or misleading. Data can be stale or out-of-date, and social media posts may have hidden agendas. The SEC has actually charged someone for sending false tweets in order to influence stock prices.
FINRA’s The investor alert added that buy or sell indicators driven by social sentiment can lead investors to make emotionally-driven or impulsive investment decisions. The SEC and FINRA advised investors to not rely solely on these tools when making decisions and to stick to a long-term financial plan.
The general consensus is that FINRA is warning investors that if they trade based on social sentiment and lose money, don’t expect FINRA to investigate, even if there is proof there were flaws in the social sentiment provider’s data. Institutions likely will want to develop clear disclosures and disclaimers for any social sentiment data they make available to investors on their platform.
Financial industry insiders applauded the alert and said the SEC and FINRA correctly identified the issues that may arise for investors.
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