When AP was hacked, unwittingly sending out a Tweet that the White House has been attacked and President Obama injured, markets fell. The combination of social media and high frequency trading proved to be particularly potent, wiping approximately $136bn from US markets within 3 minutes.

In spite of the influence social media carries, the regulation of the various platforms (Twitter, Facebook, Google, etc.) with respect to stock markets is not well established. The American Securities and Exchange Commission (SEC) now allows company information to be transmitted to investors through social media “so long as investors have been alerted about which social media will be used to disseminate such information.”

The SEC has not given guidance on the timing of disclosures or the outlets allowed. Indeed, the ruling does not even stipulate that information should be available on corporate websites in addition to other mediums. The ruling similarly avoids discussion on the timing of the disclosure or the dissemination of information across a number of channels. It is even less well established in the UK, where social media usage is more pervasive.

The lack of clear regulatory direction places an additional onus on investors, analysts and the media. Information must be sought across more channels. To meet this need, specialized research platforms exist offering investors the chance to gain a competitive advantage. Evidence from these platforms, as well as independent academic research suggests there is an advantage to this trading strategy.

Social media disclosure and trading use should be more stringently regulated in order to limit these market inequalities. In the short term, the inclusion of social media will result in the value of a company better reflected in the market place. Information will be revealed more quickly, and spread faster. In principle, this will lead to increased volatility, with limited liquidity causing additional concern.

As more companies adopt social media channels as a way to engage investors and consumers, the ability for social media to influence the market becomes greater. As research platforms incorporating social media information continue to develop, the likelihood of social information having an impact becomes larger. This suggests regulation is necessary.

However, there is reason to be concerned that regulating social media usage is a type of censorship. The recent SEC ruling developed from a court case brought against the CEO of Netflix for posting material information on his personal Twitter account. If regulators are able to regulate who is able to say what across different platforms, it approaches the infringement of civil liberties.

That being said, it would be better for regulators provide clearer guidance to material disclosures on social media, before further market problems arise. If not, the chance that misinformation to spread through social media, causing a fall in the market and economic turmoil increases. As it currently stands, investors are unaware where and when to look for company information. This adds to market fragility, and is a cause for concern.

The most significant trend affecting the financial services industry currently is increasing regulation. One of the main purpose of these new regulations (and new regulatory bodies) is to restore confidence in the market place. Social Media is the best way to reach investors, especially a new generation of investors, who are accustomed to receiving information faster, in different media platforms, and who are currently cynical of the financial industry. How can, will and should regulatory bodies and exchanges capitalize on this movement in 2012? The TSX already has a twitter page, for instance. What about an FSA Blog on upcoming regulations?

Consider, for instance, how online sentiment is already being used to predict market trends and stock prices. Social media can show attitudes “towards certain things and disdain for others, all the while displaying the overall appeal of a company.” As it turns out, this information can be incredibly influential in determining share prices. For example, the number of “followers” a company has is predictive of its valuation. More generally, the number and type of emotional words on Twitter can predict daily moves in the DJIA with almost 90% accuracy. (Personally, I’m curious how an analysis of facebook or blogs -- professional and laypersons -- would hold up). “Tweet” analysis is already being used by several companies. But, if companies begin mining for information online in order to conduct sentiment analyses, the likelihood of impulsive (or fraudulent) posts to have a meaningful (and potentially wrongful) impact is high. With social media increasingly prevalent in the world today, this risk is growing.

While one of the advantages of social media is the immediacy of information, the opportunity for mistaken stories to have a significant impact on a company’s stock is highly probable. What if major funds instantly relate to readers the trades they make? Share prices have the potential to change drastically in a short period of time. This begs the question if social media, as it relates to the financial industry, should be regulated. Won’t regulations of this nature have a negative impact on transparency and investor confidence… the reason for increased regulation in the first place? Clearly we’ve come full circle. Regardless, there are certainly ways for institutions and investors to further capitalize on this trend going forward.