In early 2021, an army of amateur investors sent shockwaves around Wall Street. Coordinating themselves over the social media site Reddit, they ramped up the share price of the video game retailer GameStop, leaving several financial institutions nursing losses.¹ This sequence of events was regarded as a landmark moment for capital markets. It dramatically illustrated the growing power of social media’s impact on an industry that had previously seemed relatively immune to its effects.
With that in mind, consider this question: What if the investment banks caught out by the “GameStop uprising” had already been tracking what was happening on Reddit? If they had social media listening in place and their antennae tuned to pick up the groundswell of sentiment? What might they have done differently then? Probably quite a lot. For one thing, they would probably have been able to foresee what might be coming—enabling them to put appropriate hedging strategies in place.
An expanding data source that can’t be ignored
The reality today is that the rising tide of social media activity can no longer be ignored by any business. A few statistics tell the story: In 2020, over 3.6 billion people were using social media, a number projected to increase to almost 4.41 billion in 2025.² With nearly 1.3 million new users joining social media daily,³ the mass of data being generated through social platforms is continuing to expand exponentially.4
Social media data can yield valuable insights for investment banks
It isn’t hard to see what’s driving this growth. In recent years, consumers worldwide have turned to social media more and more as a mechanism to voice their opinions, preferences and concerns with businesses and products. Increasingly, these opinions include views on investments – both positive and negative.
The result? Social media platforms have morphed from their original role as person communications networks into a free and very public feedback vehicle on sentiment about nearly everything from celebrities to shares. By using big data analytics, investment banks and firms can garner insights from social media activity and posts that could enable them to understand the users’ interests, behaviors and habits in near real-time.
Facing up to the data challenge
To date, this is an opportunity that many firms have not seized yet. So, what’s holding them back? Interestingly, our everyday conversations with investment banks often show a divide between the leadership and those further down the organization: Many senior leaders tend not to use social media themselves and might therefore be sceptical of the value it might provide. By contrast, their more junior—usually younger—colleagues are more familiar with social media and hence likely more excited by its business potential.
Beyond this cultural divide, there are however some practical and technical barriers that can deter financial institutions from incorporating social media into their decision-making. One is the fact that—unlike most of the data used in firms’ risk management and investment processes—social media data is unstructured and “messy”. This means it’s hard to integrate into existing systems and platforms, and new approaches are needed to aggregate, process and analyse it.
Other drawbacks include the large and ever-increasing volume and diversity of social media data. Coupled with the rapid evolution of social platforms, this can make it hard to know where to focus or how to separate the valuable “signals” from the more irrelevant “noise”. Data privacy concerns are a further barrier, given firms’ worries of overexposing their systems unnecessarily to external access.
The benefits on offer
However, all of these barriers to leveraging social media could be overcome. We think that the potential benefits could add up to a powerful business case for doing so. There are three main potential benefits—the first two of which were illustrated by the events around GameStop.
One is enhanced risk management: firms that can leverage social media data might be better-equipped to identify and mitigate emerging risks—market, portfolio, counterparty, reputation and more, even before those risks manifest themselves.
The second benefit is new insights into investing opportunities to drive higher revenues. Accessing social media data might enable firms to explore alternative data sources and feeds when assessing market players, and to discover potential new investment opportunities ahead of less alert competitors.
The third benefit, again leading to potentially higher revenues, is the opportunity to explore and develop new product offerings. By tapping into and understanding of customer conversations in near-real time, firms can identify and assess demand for new products that they might offer, or even brand partnerships that might enhance their access to specific segments or the market overall.
Three steps to seize the opportunity
In a world where data has become a critical resource, capital markets firms need to keep pace with how data is evolving, by looking beyond traditional sources such as annual reports to news articles to 10-Ks. Social media is a key alternative source they should be drawing on, enhancing the speed, scope and accuracy with which they can collect, analyse and understand customer and market insights.
So, what should firms be doing today to realize this opportunity? In our view, three things.
- Develop an appropriate social media strategy. Work out where and how social media data can be leveraged to create value across the firm. The focus may vary: with one firm the priority might be risk mitigation, while for another it may be investment ideas, and for a third new product development. Whatever the objective, it’s vital to define it clearly.
- Decide where to source the data from: There are myriad social platforms with different user groups and specializations, including some serving retail investors. Investigate which networks to tap into to support your strategy and establish fast and secure ways to feed the data into your systems—whether via a direct link or a third-party vendor.
- Define and establish clear governance and ownership: The very different characteristics of social media data means it must be ingested, stored, processed and managed often in different ways from data from traditional sources. Similarly, the risks are different, and must also be addressed.
Overall, Social Media is the world’s largest real-time, free, and public data source. It’s time to start using it to generate a competitive edge in capital markets, before your competitors do. If you’ve found this blog post interesting and would like to discuss the topic further, please feel free to reach out to me directly for a conversation.
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