The Worst Kept Secret to… social media’s impact on Wall Street and the financial markets

AP Fake Tweet DJIA Impact

Social media’s impact on Wall Street and the financial markets is worth looking into. Stocks on Wall Street’s Dow Jones Industrial Average (DJIA) tumbled about 1 percent after Associated Press, a news agency, was hacked and sent out an erroneous Twitter post about explosions at the White House and President Obama being injured on 23rd April 2013. The market recovered from the fall in a matter of minutes, but this single ‘fake news tweet’ has bought to the fore the debate and analysis on the impact of ‘breaking news’ from social media on stock prices – or how online chatter can be a predictor of future stock prices. This is more poignant now when many traders are particularly sensitive given political and major news events (such as the recent Boston Marathon and Ricin poison letters events).

DJIA Movements from Market Watch

DJIA Movements from Market Watch

Historically, it has been difficult for traders to access social media sites such as Twitter via their terminals as the site is blocked at most major financial firms given its private messaging function presents a compliance risk. However, many stock analysts, traders and wealth managers keep a close track of Twitter and events online via their personal devices. Twitter is gaining a foothold in the markets as Bloomberg recently announced that it would add Twitter to its trading-floor terminals.

However, events this week have shown just how sensitive and volatile the markets can be to major events on social media. The ‘false news tweet’ from a credible source such as Associated Press which has over 1.9 million follows – many of those in Financial Services and market-movers – highlights the inherent risks. This is complicated by many trading programmes using algorithms that analyse online news and execute trades automatically based on the news. This further reinforces the need for regulators and online security to be further ahead in their thinking and plans. Indeed, Twitter is said to further bolster its security after this hacking episode.

Just out of interest – how much of a market-loss was represented by the sudden fall in the DJIA? It can be estimated to be over $100billion – but given the nature of the DJIA it is impossible to calculate precisely because the DJIA is not weighted upon the market capitalisation of the companies that comprise it. For reference, the DJIA is an index calculated by taking the stock price of the 30 companies in the Dow and dividing it by what is known as a Dow Divisor.

It is clear that social media can and does have an effect on the financial markets and stock prices. Regulators and security firms may struggle to keep up with the pace of social media – but it is inherent on all of us to check the validity of news and cross-check multiple sources when making critical decisions.

And so there you have it, life and markets continue to be volatile – but “Olympus Has ‘Not’ Fallen” and it is not “The Day After Tomorrow”.

by Dowshan Humzah

Written By Dowshan Humzah

Dowshan Humzah has delivered profitable business growth via product development, brand innovation and digital channel expansion for blue-chip companies across Financial Services, Internet, Telecoms, Media and FMCG as well as business start-ups. He shows how organisations can benefit from applying a ‘digital and social media lens’ across their core organisational objectives and then answer the ‘so what’ question in order to generate customer and financial value from digital tools. You can find him on LinkedIn and Google+

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