Social media’s influence on investor behavior is growing, according to a new study from the FINRA Office of Financial Innovation. It is also providing opportunities for Financial Industry Regulatory Authority member firms to engage with investors and gain market insights from data.
The study found that 45% of investors receive financial advice from the internet, and 24% get information from social media. Age is a factor, with 35% of investors younger than 30 relying on social media, compared with just 13% of those 65 and older.
FINRA noted that these developments prompted it to assess the effects of social media on investing. The organization’s staff engaged with some two dozen financial institutions, software service providers, academics, industry observers and government entities.
Influential Tools
They identified several potential areas where social media techniques and tools may have an influence on the securities industry.
Investing chat groups and forums enable investors to share trading ideas, discuss market trends and develop strategies, potentially driving collective action and market activity.
These platforms may exist on traditional social media channels, such as Instagram and YouTube; on specialized investing platforms, like Stocktwits and Seeking Alpha; or directly within member firm applications.
Besides chat rooms and forums, investors are turning to “finfluencers,” financial content creators, for financial information.
Financial institutions are using various tools, FINRA’s research showed, including ones that leverage artificial intelligence, to analyze social media posts and identify investor sentiment trends.
These tools can bolster firms’ market research capabilities, inform trading strategies and support exchange surveillance to detect market manipulation or identify emerging risks before they are widely recognized.
According to the research, FINRA member firms and exchanges offer or are developing products that track popular holdings or capitalize on social media-driven investment trends.
One of these is an exchange-traded fund that invests in an index of stocks selected by a rule-based quantitative methodology that identifies U.S. common stocks with the most “positive insights” collected from online sources.
Regulatory Considerations
FINRA’s report identifies potential benefits of social media-influenced investing: increased access and wider ranges of investment information, potential to improve engagement and understanding of financial services, and identification of emerging trends.
It also points out potential risks, including misinformation and lack of transparency, fraud and market manipulation, overreliance on social media and sentiment analysis tools’ limited accuracy.
The report urges FINRA member firms to be mindful of the potential implications to their regulatory obligations as they consider whether to incorporate social media techniques into their internal systems and processes or use this technology within product offerings.
To the extent that they offer or use social media techniques, such as sentiment analysis tools, FINRA’s rules are intended to be technology neutral — meaning that policies and regulations focus on activities and outcomes rather than on particular technologies.
Securities laws, more generally, continue to apply, the report says, just as they do when member firms use any other technology or tool.
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