Section II: Social Media Tools Used in the Securities Industry

FINRA’s research highlighted various social media tools that market participants use to influence investment decisions. As discussed in greater detail below, these techniques involve social media communication platforms, sentiment analysis tools and financial product innovations.

Social Media Communication Platforms

Some investors rely on various online and app-based platforms to communicate with other individuals or groups about investing. These social media communication platforms may include investing chat groups and forums that: (i) exist on traditional social media channels (e.g., Instagram, Facebook, TikTok, X, Reddit, YouTube); (ii) are featured as part of social media channels focused specifically on investing (e.g., Stocktwits, the Commonstock platform on Medium, Seeking Alpha, Estimize, Yahoo! Finance); or (iii) are hosted directly on a member firm’s platform.¹¹

These communication platforms allow investors to share ideas on investment strategies and opportunities, discuss market trends and their impact on various holdings, post articles, ask questions, and create polls. Using investing chat groups and forums is frequently linked to the development of various trading strategies, including copy trading (involving imitating the trading activity of other traders) and meme stock trading strategies. These social media-based communication channels were noted as having a significant impact on market activity.¹²

Proponents of investing chat groups or forums frequently state that they serve to create a community of like-minded investors who are able to share viewpoints and learn from each other. However, there is also the risk that these communication platforms contain inaccurate, misleading, harmful or intentionally false information. FINRA has previously cautioned investors about the risks of relying solely on social sentiment investing tools when making investment decisions and noted it is beneficial to “[c]arefully review publicly disclosed company information, and consider reviewing other types of investment analysis, including fundamental value metrics.”¹³

In addition to chat rooms and forums, investors are also turning to individuals on social media (typically on traditional social media channels such as Instagram, Facebook, TikTok, X, Reddit and YouTube) with large followings, who provide information and advice on financial matters including investing, oftentimes for compensation.¹⁴ These social media influencers who focus on financial matters are generally referred to as “finfluencers.” While finfluencers may provide useful insights and expand access to information, they may also present certain potential risks, including due to potential lack of qualifications, or conflicts of interest.¹⁵ FINRA has previously provided information to broker-dealers regarding regulatory risks and other considerations when engaging with social media influencers.¹⁶

Sentiment Analysis Tools

Many financial institutions have begun leveraging social media data to gain valuable market insights and intelligence using various types of sentiment analysis tools that extract insights and deliver measures of public perception. Sentiment tools may use artificial intelligence (AI) techniques—including natural language processing, machine learning and other advanced analytics techniques—to parse through millions of social media posts, comments and discussions to identify potentially meaningful signals and patterns.¹⁷ Financial institutions use these sentiment analysis tools in part to gain an informational edge by detecting shifts in investor sentiment or identifying potential catalysts for market movements before they are widely recognized and reflected in prices.¹⁸

Research in the field of psychology and behavioral finance indicates that emotions play a significant role in human decision-making and, as a result, public mood and sentiment derived from social media may drive stock prices as much as sentiment derived from news reports.¹⁹ In addition, some firms have also noted that public and social sentiment drive stock market value as much as news and company performance reports.²⁰ Accordingly, market participants are seeking to combine news and financial data with social media activity, including investor mood or sentiment, as a way to potentially improve predictive capabilities.²¹ Investors can analyze news, social media and financial reports, using sentiment analysis to process thousands of tweets and news articles to gauge sentiment on the market, particular stocks or sectors.²² Market participants may also benefit from certain sentiment analysis tools designed to learn from the “wisdom of the crowd” by seeking information from a curated group to help filter out relevant information and separate signal from noise.²³ Market participants may use this crowdsourcing technique to distill usable information and insight from a broader set of social media sources.²⁴ With these use cases in mind, financial institutions are seeking the ability to monitor and analyze the vast amount of information shared on social media to potentially uncover emerging trends, gauge investor sentiment and identify potential trading opportunities.²⁵

Some financial institutions, particularly hedge funds and other sophisticated market participants, have developed proprietary sentiment analysis tools to extract and analyze social media data, which they can then use to inform trading and investing decisions as well as gain broader insights into markets.²⁶ For example, S&P Dow Jones Indices launched the S&P 500 Twitter Sentiment Index Series to measure bullish and bearish tweets to both assess individual stocks as well as the broader index.²⁷ In addition, companies widely use sentiment analysis, across various sectors, for brand management—more specifically to improve awareness of what consumers are saying, on social media, about a company’s services.²⁸

Recognizing the potential value of sentiment analysis tools, certain financial institutions have partnered with specialized vendors and service providers to incorporate social media-powered insights into their investment research and decision-making processes. For example, service providers like Bloomberg, Brandwatch, Stockpulse and Context Analytics offer products and services that aggregate and analyze social media data, providing clients with sentiment scores, trend analysis and other market intelligence.²⁹ A range of market participants, from broker-dealers to hedge funds to asset managers, use these sentiment analysis tools to supplement their traditional research workflows. 

In some cases, financial institutions may provide information regarding sentiment analysis tools to investors, which may include access to real-time social sentiment data and indicators.³⁰ Some service providers also make their sentiment analysis tools available directly to the public for a fee or, in some cases, for free.³¹

Exchanges also use sentiment analysis tools to assist with market surveillance.³² For example, exchanges may use sentiment analysis tools to collect and analyze social media data and provide a risk score to help uncover broader, telling trends in social media activity as it relates to market trading and price activity.³³ Surveillance and market intelligence teams at financial regulators may also use social media sentiment analysis and data aggregation tools to aid in investigations—for example, leveraging insights from social media chatter may uncover insights related to specific stocks that pertain to insider trading or other market manipulation.³⁴

The heightened demand for sentiment analysis tools may reflect the growing desire for social media-derived insights among a broader range of market participants. However, as discussed in greater detail in Section III of this report, using social media data for investment purposes carries risks, including concerns around data quality and potential manipulation.³⁵ Accordingly, market participants noted that they generally seek to access the vast amounts of data generated on social media platforms to uncover signals that can complement traditional financial analysis while being cognizant of and taking measures to limit potential risks.³⁶

Financial Product Innovations

In addition to leveraging social media data and sentiment analysis for investment research and decision-making, market participants, including member firms, may offer financial products designed to capitalize on social media-driven investment trends or to provide indices that track popular holdings.³⁷

For example, one financial product structured as an exchange traded fund (ETF) invests in an index of stocks selected by a rule-based quantitative methodology that is designed to identify U.S. common stocks with the most “positive insights” collected from online sources, including social media, news articles, blog posts and other alternative data sets.³⁸ The fund indicates that this underlying index uses AI tools, such as natural language processing, to analyze social media posts and other online content to identify stocks that are generating significant positive sentiment among investors.³⁹ Similarly, another ETF product is designed to reflect the 50 most widely held equities among a firm’s customer base.⁴⁰ In other cases, firms have made available a fund that reflects the most popular stocks their customers hold.⁴¹ While these products offer new opportunities, investors should carefully consider their own investment circumstances, including their age, other investments, financial situation and needs, risk tolerance and other factors.