SEC, Finra warn investors not to base stock decisions on social sentiment

Social media posts can have hidden agendas, regulators said.

May 9, 2019 @ 2:38 pm

By Ryan W. Neal

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.

(More: Index based on social media sentiment gives new weight to tweets)

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 Data can be stale or out-of-date, and social media posts may have hidden agendas.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.

(More:What 401(k) advisers can learn from a viral social media post)

"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.


What do you think?

View comments

Upcoming event

Sep 24


Diversity & Inclusion Awards

Attend an event celebrating diversity and inclusion as well as recognizing those who are leading the financial services profession in this important endeavor. Join InvestmentNews, as we strive to raise awareness, educate and inspire an... Learn more

Most watched


Finding innovation in your firm

Adam Holt of AssetMap explains how advisers understand they need to grow, but great innovation may be lurking right under your nose.


Finding your edge from Tony Robbins

Guru Tony Robbins has helped a lot of people, but armed with his psychology Financial Advisor Josh Nelson has helped his practice soar.

Latest news & opinion

Redtail CRM data breach exposes personal client data

The information exposed includes names, addresses, dates of birth and Social Security numbers.

This strategy can double your estate-tax exemption

'Portability' allows a surviving spouse to tack the decedent's exemption on to his or her own. Despite the higher threshold for paying estate taxes in the 2017 tax law, experts recommend filing for the benefit.

Couple in Morgan Stanley advisory account wins $519,000 arb case over unsuitable investments

Plaintiff's lawyer says junk bonds, futures contracts and derivatives were inappropriate for his clients.

The growth of factor-based investing

Advisers are making decisions about clients' portfolios by using the same characteristics that govern factor-based ETFs.

Finra makes its list to target hundreds of rogue individuals

The regulator sees patterns in the behavior and disclosures of high-risk brokers.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print