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.