Want to Lessen Volatility of Financial Markets? Express Your Thoughts Online!

Co-authored with Steve Krawciw

In the last year or so, stock prices have been moving drastically up and down, a phenomenon known as market volatility. The latest research from AbleMarkets shows that investors can help reduce intraday volatility by collectively expressing their opinions about a stock's imminent direction on social media. By speaking up online, investors appear to speed up the formation of market consensus and the resulting price adjustment, minimizing price volatility in the process.

Social media continuously updates our collective knowledge of financial markets. Investors posting their thoughts online and experiences with a particular publicly-traded firm may encourage others to consider investing into the stock of that company. AbleMarkets research shows that the aggregate volume of social media commentary may make an impact not just on the price, but also on the volatility of a particular stock. This article summarizes the results of analysis using the AbleMarkets Internet Chatter Index, an index of social media activity that continuously tracks Internet mentions of companies on a variety of social media websites. The Index, running since 2009, deploys a complicated custom-built technology to continuously poll a vast proprietary universe of social media sites. Twitter is expressly not part of that universe of websites.

As AbleMarkets analysis shows, overall, the higher the social media activity related to a particular company during a 24-hour period on a given trading day, the higher the company's stock volatility on that day. However, higher social media activity during market hours results in lower volatility of discussed stocks. This phenomenon may be a product of social media's efficiency in distributing news and news' subsequent incorporation in stock prices. Increasing amounts of social media discussion about a particular company results in the consensus being reached faster. Social media discussions from 4 PM ET until 4 AM ET, however, are highly predictive of the next trading day's volatility.

AbleMarkets analysis shows that when people discuss their beliefs online, they make their previously private information public, and stabilize the markets. The phenomenon is consistent with academic theories of Finance. One of the theories, the Efficient Market Hypothesis, was first posited by Eugene Fama of University of Chicago in the 1970s, long before the Internet existed as we know it today. According to Fama's thinking, if everyone's knowledge and beliefs were available for everyone else to see, prices would reach steady levels almost immediately following any news.

Can one individual's contributions to social media really calm down the markets? As with all social media, strength is in the numbers - the more that people decide to share their thoughts, the faster the market will reach a consensus of the appropriate price level.

First developed in 2009, AbleMarkets Internet Chatter Index captures social media activity on a wide range of websites. AbleMarkets Internet Chatter Index is available for 1,000+ stocks via monthly subscription. Please contact steve@ablemarkets.com or call +1 (646) 580-4949 for additional information.