Influence of social networks on financial markets - Octa overview

For more information, read the article. In modern conditions, social media create an environment in which the principles of interaction between people are fundamentally changing. Today, everyone can instantly interact with a lot of people via social media—which can have a significant effect on the reputation of public companies and their quotes.

First calls, and dive deep into the story
The first case that exposed the potential threat of social media to the financial industry occurred in 2013. At 1:08 p.m. on 23 April, a fake tweet from a hacked Associated Press account stated, ‘Two explosions at the U.S. White House, Barack Obama injured.’ Stock prices immediately plummeted, wiping out the value of the S&P 500 by more than 0.9%, or $130 billion, in less than three minutes. This was the first such case on Twitter, and as is often the case on Twitter, it was brief and superficial. The Associated Press itself was quick to clarify the false nature of these messages, and the White House confirmed it, and the markets recovered the next day.

Social media as a political tool
Another striking example of the impact on financial markets through Twitter is the messages of the former U.S. President, Donald Trump. He used his Twitter account to report crucial economic news and repeatedly threaten Chinese officials with tariff hikes, at times causing market and investment turmoil.

According to Bank of America Merrill Lynch, U.S. stocks have tended to fall on days when Trump tweets more than 35 times and rise on days when he tweets less than five times. JPMorgan even created ‘Volfefe Index’, playing off Trump's viral typo ‘covfefe’ he tweeted in 2017, to track market movements in response to the president's social media activity. During Donald Trump's most significant social media activity, JPMorgan noted that ‘tweets have increasingly moved U.S. rates markets immediately after publication.’

‘There is indeed a correlation between trader sentiment, which can be evaluated based on tweets, and market movements—a 1% increase in the 'negative sentiment' indicator is followed by a 0.03% drop in the exchange rate,’ said Kar Yong Ang, the Octa financial market analyst. 'However, the effect does not last more than an hour—the tool is therefore unsuitable for longer-term forecasts,' he added.

During Donald Trump's presidency, major financial conglomerates created particular indices that tracked the correlation between his tweets and volatility in the U.S. stock market. Now, updating of these indices is on hold as it has been almost three years since Trump last tweeted about the news and the economy as a U.S. president.

Previous presidents have not maintained the same social media presence—and some critics suggest that Trump's tweets have put inappropriate pressure on politically independent bodies such as the Fed. It all resulted in a permanent erosion of central bank independence during Trump's term, as investors no longer perceive the Federal Reserve as independent of the executive branch.

This reinforces that a strong media personality is an opinion leader and can influence capital markets.

The impact of social media on cryptocurrency prices
The rise of cryptocurrencies has become a big deal in recent years, and it's impossible to overlook how social media affect market patterns and price movements. Social media has played a significant role in encouraging the use of cryptocurrencies for payments. Users often share information about the latest market trends and developments on prominent cryptocurrency discussion sites, including X (former Twitter) and Reddit.

Influencers in the cryptocurrency space often have a significant effect on the value of cryptocurrencies, especially minor altcoins, as followers value their opinions and may decide to invest in specific cryptocurrencies due to their advice. However, it can also lead to market manipulation and ‘pump and dump’ scams, where influencers artificially increase the price of a cryptocurrency before selling their assets profitably.

Memes are another way social media influences cryptocurrency prices and market movements. On social media, memes are a common way of communicating, and memes about cryptocurrencies have been viral in recent years. For example, the famous ‘To the Moon’ meme is used to convey enthusiasm about the potential of a particular cryptocurrency.

While memes may seem like innocent entertainment, they can have a big impact on the value of cryptocurrency. A certain cryptocurrency may rise in value because of the hype that memes can generate. However, if the fundamentals behind the enthusiasm are strong, the promotion may only last for a while, and prices may plummet.

As we can see, the penetration of social media in the financial world is intense and is only getting stronger every year. In addition to classical fundamental and technical analysis, a third dimension is emerging, through which it is possible to track short-term price changes and use this information as an additional investing opportunity.

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Octa

Octa is an international broker that has been providing online trading services worldwide since 2011. It offers commission-free access to financial markets and various services already utilised by clients from 180 countries who have opened more than 42 million trading accounts. Free educational webinars, articles, and analytical tools they provide help clients reach their investment goals.

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