CBOE launches social media sentiment indices
Chicago Board Options Exchange is partnering with a Chicago-based technology firm that tracks social media to develop a new set of indices that measure short-term market momentum.
The partnership is based on the idea that comments on Twitter and other social media can be used to extract predictive signals for traders and investors. CBOE's partner, Social Market Analytics, has developed a process for sifting through social media, filtering out irrelevant comments and identifying comments that indicate a trading intention. The company uses this information to generate "S-Scores," an indicator that reflects trader sentiment.
CBOE and SMA formed their partnership in June and CBOE launched the first index in August. The CBOE-SMA Large Cap Index tracks the performance of a portfolio of 25 stocks with high S-Scores. The index is reconstituted daily, based on which large-cap stocks have the highest S-scores at the start of the day.
“Extracting information from social media to make investment decisions represents a new and promising frontier in strategy benchmarking," said William Speth, vice president, research and product development, CBOE. “Our research suggests that there is a high correlation between the price movements in stocks and SMA’s data. Investors could potentially use these benchmarks to build strategies to enhance risk-adjusted returns in a portfolio.”
SMA is one of the pioneers in the emerging field of companies that extract trading signals from social media. Joe Gits, the company's chief executive officer, explained how the process works in an article published in the June 2015 issue of MarketVoice.
