How China’s censorship on trade war throws off the algos
May 15, 2019
By Sunny Oh
Wall Street uses social media algorithms to track sentiment of Chinese individual investors
Quantitative investors say censorship around the chief source of China’s equity tumble highlights the limitations of algorithms used to sift through millions of social media posts and news articles in real time to mine investor sentiment. This comes as quantitative hedge funds and well-resourced money managers, such as BlackRock Inc. BLK, +0.70% advocate looking at social media data to check the pulse of unsophisticated retail traders in China’s stock markets.
The analysis of social media first got its start as part of a broad movement in Wall Street to analyze unconventional data sources such as satellite images and credit-card transactions. In developed markets like the U.S., where trade is largely driven by larger institutional investors, social media was mostly used to root out sources of undiscovered information that had yet to affect stock values.
But Phillip Wool, director of research at Rayliant Global Advisors, said that in China, quants use such data in China to find how much mom-and-pop investors, who often act more on speculation and not fundamentals, overreacted to market-moving events like a product launch or allegations of accounting manipulation.
He said there is plenty of opportunity to seize on investor mistakes when retail traders are responsible for more than 80% of turnover in China-listed stocks, according to the China Securities Regulatory Commission.