Can you trade off of Twitter? The Chicago Board Options Exchange and its partner Social Market Analytics (SMA) believe so.
The two firms are partnering on a suite of sentiment-based indexes that use tweet data to generate alpha. The first of the suite, the CBOE-SMA Large-Cap Index (SMLC Index), debuted on July 29. The index is simply published by CBOE at this point, but a tradeable contract may be coming.
Joe Gits, CEO and co-founder of SMA, has been watching and monitoring Twitter for years. Gits has a background in quantitative analytics, and, soon after Twitter debuted in 2006, Gits was fielding queries about harnessing the power of the little blue bird. In early 2009, there were some 2.5 million tweets per day. Today, total daily tweets number half a billion, plenty of which are focused on the markets and current economic landscape. In Gits’ research and efforts to build a company that filters and gleans information from the social media giant, it has become clear Twitter matters to those who trade the markets.
“We’ve got nearly five years now of sample data that shows the data is statistically significant,” Gits said. “Five years might not seem like a lot, but if you look at social media — that’s a lot of data. It consistently outperformed the market and these stocks consistently outperformed.”
The index is based upon SMA’s S-Score, a custom market sentiment gauge of how positive a conversation is about a certain security relative to historical norms. The SMLC is a daily rebalanced, equal-weighted index composed of 25 stocks from the CBOE Large Cap Universe with the highest S-Score. The CBOE Large Cap Universe is generally 450 or so stocks that fit a few qualifications — market cap greater than $10 billion, underlying for listed options, in the top 15 percent capitalization tranche of those CBOE listed options.
And, so far, so good since its launch:
The green line represents the daily performance of the SMLC; the black line represents the daily performance of the S&P 500. Image by Joe Gits, SMA
The next item on the agenda is an index with the same methodology, just rebalanced weekly instead of daily.
“Then we’re going to roll into a series of sector and industry based indexes. Probably some specific index relative ones,” Gits said. “So, it’ll be weekly and then rolling into specialty. We have a lot of interest from the major banks out there to create some structured products around this.”
From tweet data, SMA covers more than 4000 equities, 100-plus futures contracts, over 150 exchange-traded funds, 45 currencies and major sectors and indices, so there are sweeping possibilities. SMA doesn’t allow just any tweet regarding a security, company or sector to make the cut. A quant model analyzes an account’s body of tweets to determine if it qualifies as a market professional — only then does the tweet get factored into SMA’s data set.
While SMA and Twitter have a good relationship, SMA’s approach is platform agnostic.
“Our platform is not a Twitter platform. It’s a platform that takes unstructured data and turns it into a quant feed. So, we can take it — whether it’s WordPress, whether it’s blogs, whether it’s search data — we could take any data and turn it into a quant source,” Gits said. “Twitter happens to be the one that people are clamoring for, and you do see statistical alpha in there… As new sources come out — because I don’t think people are going to start communicating less — we’ll add other sources.”
While this index suite needs to build a track record, thus far, Twitter as a tool for SMA has been doing just fine — SMA analysis pointed the way to Brexit two weeks before the vote and indicted Microsoft would purchase LinkedIn before any of the major networks broke the news.
“I think it’s pretty much a settled matter among a lot of people that social media breaks news first and you see it real time in the data and it’s only going to get bigger,” Gits said.