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. LikeFolio provides earnings predictions to individual investors directly and via integration with TD Ameritrade, and is selling data to quantitative fund managers, according to its founder Andy Swan. For financial advisers, LikeFolio has a model portfolio it makes available on the Riskalyze model marketplace, he said. Mr. Swan is on Riskalyze's board.
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 Data can be stale or out-of-date, and social media posts may have hidden agendas.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.
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.
"My interpretation is that FINRA is warning investors that if they trade based on social sentiment and lose money, don't expect FINRA to award consideration, even if there is proof there were flaws in the social sentiment provider's data," said FPPad founder and CEO Bill Winterberg. "Institutions like TD likely will want to develop clear disclosures and disclaimers for any social sentiment data they make available to investors on their platform."
Riskalyze spokesperson Jessica Torchia said the company doesn't comment on individual investment models available on its Partner Store. She said one of the values of a financial adviser is conducting due diligence on investment strategies and models.
"The fiduciary advisers we serve do a great job of doing thorough due diligence on behalf of their clients," Ms. Torchia said.
Mr. Swan applauded the alert and said the SEC and Finra correctly identified the issues and validated the service that LikeFolio provides.
"We agree that there is a lot of gaming and a lot of spam when social data companies are looking purely at hashtags or ticker symbols," Mr. Swan said, adding that LikeFolio uses methodology that is verified by academic research. "Because we're focused on consumer behaviors and mentions of brands and products owned by publicly traded companies, we have a distinct advantage compared to others."
Social Market Analytics and TD Ameritrade each said they, too, applaud the SEC decision.
Social Market Analytics said it has two U.S patents developed "to prevent just this kind of abuse."
TD Ameritrade said it tries to provide investors with a wide variety of data sources and third-party research, and that it agrees that social sentiment data should not be the sole information used to make an investment decision.