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Social Information Arbitrage: Trading Twitter

Social Information Arbitrage is a form of arbitrage trading that scrutinizes trending topics to identify price-impacting information and exploits that information before the market factors it in thoroughly. Traders can spot such insightful trends on various social media platforms, Google Trends, stock discussion boards, or personal interaction with consumers.

Key Takeaways

  • Information Arbitrage investing leverages the power of acting on unconventional price-impacting information before the public knows about it.
  • Social Information Arbitrage primarily narrows the source of such information to social media platforms, microblogging sites, Google Trends, discussion boards, etc.
  • “Social Arb” as a concept has always existed in the market, but trader Chris Camillo made it mainstream by popularizing this investment strategy.
  • Chris follows a simple process of identifying the emerging trends, verifying if the information exists in the public domain, and acting upon it before there is information parity.
  • Artificial Intelligence, Machine Learning, Sentiment Analysis tools, and other Data Intelligence techniques are critical in discovering insights.

Table of Contents

Traditionally, successful investment decisions depend primarily on conventional sources of information, trade journals, and media publications. However, “Social Arb” investing is different. Social media has emerged as a massive phenomenon over the years, and it is one of the quickest and most efficient ways of gathering information influencing investors’ judgment.

Markets have realized and accepted the importance of Twitter and the “FinTwit” community in this regard. It is now considered the quickest and most instantaneous source of news globally. It began as a simple microblogging platform, but today it has evolved into an up-to-minute news disseminator. Stories have often appeared on the platform hours before traditional media captures them. In other cases, even a single tweet from an influential personality changes the course of markets. Smart investors have begun to take note of it and exploit the information disparity.

A research paper titled, Analyzing The Role Of Social Media In Investment Decision by scholars Ekta Ashokkumar Mistri and Dr. Gurudutta P. Japee in 2020 revealed five million affluent investors with investable sums of over $100,000 in the US and Canada now use social media to research financial decisions.

The research report, Twitter mood predicts the stock market, by business professors Johan Bollen, Huina Mao, and Xiao-Jun Zeng, indicated that Twitter’s accuracy level of predicting the Dow Jones Industrial Average was 87.6%.

Chris Camillo: The King of Social Arb

The concept of social information impacting investment decisions has forever existed in some form or the other. André Kostolany, one of the most successful 20th-century stock market investors, also noted this trend then. He said, “Facts only account for 10% of the reactions on the stock market; everything else is psychology.”

However, Social Information Arbitrage has recently gained the spotlight only after Chris Camillo’s news turning $20,000 into $2 million within three years went viral. After incurring massive losses through conventional trading methods, Camillo was inspired to try a different perspective after reading Peter Lynch’s book — One up on Wall Street.

In this book, Lynch stated that the only way to beat Wall Street is through an information edge. Camillo applied it in recent times and thus is considered the pioneer of new-age social information arbitrage.

Chris Camillo’s Investing Journey

Chris Camillo is a living example of how you do not need to read tons of investing books, have a formal degree in finance, or years of trading experience to beat Wall Street. With due credence to the conventional modes of acquiring investing acumen, Chris shows us how we too can earn huge profits in the stock market through Social Information Arbitrage.

He credits his massive gains to the time he spent analyzing Facebook posts, studying consumer reactions while shopping at the mall, and reading tabloids. Chris also offered a peek into his insights and strategies through his 2011 book Laughing at Wall Street: How I Beat the Pros at investing. In 2006, he applied Social Information Arbitrage strategy and invested $20k in the stock market, and earned $9.7 million in trading profits over the next ten years. Jack Schwager, in his book, Unknown Market Wizards, stated that Chris had gained 68.4% average annual compounded returns between 2007-2020

Chris Camillo is also an entrepreneur with a couple of ventures. He is the founder of TickerTags, a social data intelligence company, which accurately predicted Brexit results using social media data in 2016 before the polls closed.

He also co-owns Dumb Money TV, a media company, with friends Dave Hanson and Jordan Mclain. They share behind the scene Vlogs and engaging podcasts about their investing stories. Dumb Money TV enjoys quite a following, and credit goes to Chris Camillo and his team for making “Social Arb” a mainstream phenomenon. Their unique perspective has interested many millennial investors who do not wish to opt for the conventional path.

Chris doesn’t believe in fundamental or technical analysis. He encapsulates his strategies into three significant steps:

  1. When you find an exciting piece of information or spot a unique trend, ask yourself if it has the potential to impact the stock price positively or negatively.
  2. Next, ask yourself if the market already knows this information. You can verify this by reading journals, blogs, articles, or any publicly released information. If your answer is YES, then there is no point in making a trade. However, if the answer to that is NO, then you have Social Information arbitrage opportunity.
  3. Do you foresee a trade window that could have a more considerable impact on the stock price? This could be an event that has the potential to eclipse the impact of the hidden information that you had foreseen. Because, if there is some negative piece of information during this period, it might screw up your profit potential.

Let us take a detailed look into Camillo’s philosophy about social media influencing the stock market investment.

Online Investment Forums 2.0

Several social media portals and microblogging sites play a critical role in connecting investors with one another. It also provides them a platform to access market-moving information in one place and share their reactions. Investors are quite aware of the Motley Fool and Yahoo! Finance discussion boards for years. However, emerging platforms like Stocktwits and Reddit boards have upped the game for Social Information Arbitrage in recent times.

Such communities are very active, and there is always a buzz happening around every event, whether big or small. Investors who participate earnestly in these communities get a first-hand feel of the market pulse. It is the best place to tap the customers’ raw feedback about a company’s newly released or existing products. Smart investors can also use these social media communities to gauge the excitement or speculation around an upcoming product or service or any other critical corporate development.

Social, Financial Chatter Analysis

According to Chris Camillo, social chatter analysis is becoming more accepted by institutional investors and will make its way to the mainstream in the coming years. He is also an investor and board member of HedgeChatter, a financial chatter analysis startup that aims to turn unstructured financial conversations into deep financial insight tools for investors.

Aggregating and analyzing the real-time financial conversations across many investment discussion forums, blogs, or microblogging platforms is possible only due to cutting-edge technology. This technology many times also helps to generate a stock’s buy/sell rating based on “sentiment.” The sentiment is a broader reflection of how investors perceive a company traded on the stock markets.

Therefore, this entire process of analyzing the emotions, tone, and intent behind the comments, themes, and social media posts is called Sentiment Analysis. It is also known as Emotional Data Intelligence, wherein Artificial Intelligence, Machine Learning, and Natural Language Processing are applied to data to analyze the underlying emotions.

These techniques scan massive text strings for words with a positive or negative undertone, and then it assigns a sentiment score to the text. In the information arbitrage investing context, sentiment analysis tools assess how optimistic or pessimistic investors feel about a particular stock. More advanced sentiment analysis tools can distinguish between positive and negative connotations within a single sentence. Besides HedgeChatter, several other sentiment analysis tools also wade through the social media posts and conversations to extract deep insights.

StockPulse is one such social chatter analysis tool, collects and analyzes data from social media sources in English, Chinese, and German. It also has historical data from non-conventional sources as old as that from 2011. Stock Pulse also uses advanced Sentiment analysis tools and Natural Language Processing methodologies to extract topics and probes into the massive text bodies’ semantic structure. Some of the other widely used Sensitivity Analysis Tools are Awario, Mentionlytics, Lexalytics, Mediatoolkit, and Brandwatch.

Chatter Analysis Key Points

Social chatter analysis or Sentiment analysis has immense utility in Social Information arbitrage. However, sometimes the presence of spam, bots, or misleading information distorts the analysis. The techniques or tools involved in Sentiment analysis must take care of the following three points to ensure a more meaningful analysis with minimum anomalies.

Monitoring the use of spam or bots for possible price manipulation

While social media trends and data have the power to move the markets, we must ensure that bots or spam posts do not cause price manipulation. To provide authentic social media messages, comprehensive and sophisticated spam detection algorithms are very useful.

These techniques detect whether social media authors or users are spreading false or misleading information. Their offensive language and spammy nature can identify statements of malicious intent. Such unauthentic news can be detrimental to a company’s reputation and stock prices.

In 2010, Australian airliner QANTAS witnessed a massive drop in the share price following a misleading tweet about Indonesia’s plane crash. Interestingly, when this false news was in circulation, the flight was still in the air. QANTAS Chief Executive Officer Alan Joyce was compelled to clarify to The World Today, “We first noticed a problem when our share price started to collapse, and that’s because of these reports coming out of Twitter.”

Significant events in financial markets can impact price movements to a large extent. For better sentiment analysis, the tools must closely monitor these events as they are essential. Such events can be any theme featuring keywords describing it in further detail. Each event contains a keyword with a particular weightage based on the event’s importance.

Segregating comments from credible sources from the rest.

Individual market participants have a higher impact on the stock price movements than others. These include verified social media accounts of CEOs of listed companies, politicians, analysts, journalists, etc. For unbiased sentiment analysis, the tools must segregate these tweets, posts, or opinions of the highly credible users from the less authentic ones.

Social Information Arbitrage Examples

Though Social Information arbitrage is a broad term, Chris has tried to explain the dynamics by citing a few examples:

2011 - LeapPad Explorer Educational Children’s Toy

In 2011, the freshly launched LeapPad Explorer educational children’s toy by LeapFrog Enterprises saw an exponential surge in its year-over-year sales. Because of this, the investors of the company witnessed triple-digit returns.

LeapPad

The stock was only trading at $3 per share then and did not witness any noteworthy development in its business before this. However, the sales of these educational toys moved the needle for LeapFrog Enterprises in 2011. The company also launched two more versions of the toys in the subsequent years.

Interestingly, it was the “mommy bloggers,” with no relation to the investment world – not the Wall Street analysts, who first predicted record holiday demand for the newly launched toy in 2011. Smart investors who were a part of these “mommy” blog communities would have undoubtedly benefited from these insights.

2011 - Target sells Missoni line of clothing

Chris came to know about the partnership between Target and the Italian fashion house, Missoni, from his wife. On the day of the launch, Chris stood in the queue of 150 shoppers to see every piece sold out within two hours. He soon found out that every Target store in the country has seen a similar situation. This, according to Chris, was a piece of game-changing information that Wall Street was yet to access. He invested money in Target stock, and it tripled within 48 hours.

2016 - Pokemon Go for Nintendo

In 2016, Chris Camillo analyzed the social buzz around the Pokemon Go game and forecasted its tremendous success months way before its release. He also predicted that the Nintendo stock would double in value.

Pokemon Go

2019 - E.L.F. Beauty

In March 2019, beauty Youtuber Jeffreestar, with over 16 million subscribers, reviewed E.L.F. Beauty’s make-up product, Camo Concealer. The video has garnered a total of 14 million views and inspired many millennials to purchase the product. This was a significant turning point for E.L.F. Beauty. Between March to September 2019, the stock more than doubled from $8 to $17.5. Chris Camillio acquired shares and call options of the cosmetic company to maximize his profits in this case.

2020 - McDonald’s Travis Scott Meal

In early September 2020, Mcdonald’s launched the limited period meals based on the viral rapper Travis Scott’s favorite childhood order. The $6 meal had no special toy or prop, but Quarter Pound burgers with cheese, bacon, and lettuce alongside Sprite, french fries, and BBQ dipping sauce.

The meal was a runaway success, with the fast-food chain running out of ingredients in just a few days. The meal’s unexpected phenomenal success, especially in Houston and Los Angeles, also encouraged viral Tik Tok Video, which showed diehard Scott fans blasting the rapper’s track “Sicko Mode” at McDonald’s drive-thru windows. The sensational rapper has a huge following, and Mcdonald’s was the first to capitalize on it.

While Scott’s fans enjoyed the meals and the trending TikTok videos, smart investors identified the event as a precursor to a rebound in the flagging Mc Donald’s sale post-pandemic. The Travis Scott meal, combined with a couple of other positive factors, helped Mc Donald’s stock hit a 52-week high of $226.72 a week after its launch.

The fast-food giant indeed clocked in a 4.6% increase in its comparable sales during the third quarter, reversing an 8.7% decline in the previous quarter. McDonald’s also officially credited the Travis Scott meal as the primary reason behind the highest US monthly sales in nearly a decade despite the COVID-19 lockdown.

Conclusion

Identifying price-impacting information through social trends requires sharp foresight. We spend so much time on Facebook, YouTube, Instagram, Telegram, Twitter, and other social media platforms. However, it doesn’t last beyond casual conversations and habitual feed scrolling.

To reap Social Information Arbitrage’s benefits, an investor must mentally train himself to analyze the trends from a different perspective. He also has to ensure if these trends are meaningful enough to impact the stock price. This is what Chris Camillo has been doing for more than a decade, and he has been immensely successful.

That said, Social Information Arbitrage is not devoid of risks. Sometimes, there is a barrage of misinformation that can destroy the trend analysis. Hence, an investor has to exercise complete discretion. He must be sure of the conversations and trends to pick and the ones to ignore.

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Leo Smigel

Based in Pittsburgh, Analyzing Alpha is a blog by Leo Smigel exploring what works in the markets.