Tuning in to the Emotions of the Capital Markets with Sentiment Analysis

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1 A Poit of View Tuig i to the Emotios of the Capital Markets with Setimet Aalysis Abstract It is crucial for firms operatig i fiacial markets to uderstad ivestor eeds, customer prefereces, ad society perspectives. Digital iovatios ad social media proliferatio are addig aother dimesio to the study of customer behavior ad the emotioal views of other stakeholders. I this paper, we discuss the emergig tred of aalyzig the setimets of customer ad ivestor groups. With this aalysis, you have aother tool to predict ad idetify eeds ad defie ad refie products so they meet expressed or latet customer expectatios. We will also cosider the possible applicatios ad related challeges of setimet aalysis. Emergig Treds i the Capital Markets Idustry The capital markets idustry has historically relied o the estimatios ad bechmarks of regulators ad key fiacial itermediaries to feed its aalytical models. They use traditioal data poits such as stock price movemets, divided payouts, ad balace sheet ratios combied with market forecasts ad ecoomic idicators. However, key stakeholders such as potetial ad existig cliets, ivestors, ad aalysts are iflueced by qualitative iformatio as well. They liste to their peers, colleagues, ad persuasive voices i the idustry. This makes covetioal models ureliable. The capital markets idustry is ow tappig ito the stream of opiios o the iteret to uderstad the prevailig market setimet. Orgaizatios are realizig the potetial impact of this digital chatter o their brad ad busiess. Iformatio scietists are beig commissioed to capture ad itegrate this massive digital dataset that comprises of social media ewsfeeds, blogs, ad olie forums, with the traditioal datasets. Accessig, moitorig, ad aalyzig this data provides valuable ifereces that are relevat to busiess fuctios, such as research, operatios, ad sales. The successful programs are able to produce more robust ifereces. Behavioral fiace, the study of emotio drive fiacial decisios, is iterestig to the capital markets idustry. Historically, market timig ad pick-up decisios of professioal ivestors are based o close observatios of the subtle sigs emitted from differet emotive reactios of the wider ordiary ivestor commuity. Professioal ivestors ad fiacial itermediaries ca geerate valuable isights by combiig setimet aalysis ad behavioral fiace. These isights ca help exploit the opportuities from market iefficiecies. Usig Setimet Aalysis Setimet aalysis is a process by which public opiio is scaed to determie whether the attitudes to a particular topic are positive, egative, or eutral. It ca play a pivotal role across the capital market value chai, from ivestmet decisio to performace aalysis. By uderstadig the eeds of customers ad their satisfactio with products, the process allows firms to improve their products. If used correctly, setimet aalysis helps reiforce positive opiios ad eutralize egative opiios before they become public.

2 Settig the Foudatio The cocept of setimet aalysis is still i its ifacy. While practical models already exist, developers ad users have a lot to lear. The process of usig data poits from olie chaels is still evolvig, but the key steps are idetified i figure 1. Set Data Sources ad Crawlig Method Aalyze Data Defie Cotext Uiverse Apply Domai Sythesis ad Custom Logic Preset the Results Figure 1: Setimet Aalysis Methodology Let s take a closer look at the methodology. 1. Defie cotext uiverse: Create ad prioritize a baselie of reliable iformatio sources; map these sources ad correspodig data capture frequecies 2. Set parameters: Defie keywords, frequecies of sources, ad other cosideratios of your data set 3. Customize to the domai: Apply domai sythesis ad custom logic ad capture data from defied sources 4. Aalyze data: Deduce idetifiable patters, assig relative weightage ad priority; use setimet aalysis algorithms to aalyze what has bee captured ad derive the outcome. 5. Preset the results: Showcase ifereces ad results i a pre-defied format Selectig the right data sources (settig the cotext uiverse) is a pre-requisite. For capital markets, setimet aalysis ca feed o covetioal data sources like market data, fiacial ews, ad historical performace data. The cotext uiverse for setimet aalysis could iclude: A timeframe the past week for a stock, compay or product Geographies product related posts i a certai coutry after the ba of a product Commuities setimets of the shareholder commuity after the aoucemet of fiacial results A idustry sector ivestor setimets for ifrastructure stocks after a electio A topic or evet a merger or a acquisitio The tool beig used to collect data should also be able to itegrate with iteral eterprise data sources like customer database, ad campaig ad sales data for custom aalytics. Users ad developers also eed to decide the extet of aalysis or drill dow capabilities required i a specific applicatio. Usig the ifereces derived from setimet aalysis i isolatio might provide a skewed view of the market. Itegratig setimet aalysis outputs with product developmet, sales plaig, campaig maagemet, or eve ivestmet decisio systems is worth cosiderig. How the Capital Markets Idustry Ca Use Setimet Aalysis Like fudametal aalysis or techical aalysis, setimet aalysis may soo be used as a decisio tool for ivestmets. A tracker portfolio or idex based o setimet aalysis would be somethig similar to a emergig market allocatio i a ivestmet portfolio. Social media creates a deeper level of persoalizatio ad builds loyalty amog cliets. To beefit from this tred, may firms are ecouragig fiacial advisors to use social chaels for customer egagemet. The traiig ivolved may make this a loger-term objective. I the iterim, listeig i to social media feeds to uderstad the issues faced by cliets is a good idea. 2

3 Real-time social data i the form of customers family situatio, busiess iterests, passios, behavior patters ad decisios, alog with data from other systems, such as CRM ad ERP, provide a deeper uderstadig of customers. The opportuity lies i the ability to idetify a emergig eed from social activity, ad demographic data, ad follow it up with timely products ad services. Figure 2 highlights a few areas where setimet aalysis ca be used. Product Desig To predict ad idetify expressed ad implicit eeds, ad defie ad refie the products ad services Ivestmet Allocatio For portfolio allocatio ad performace evaluatio Service Chael Desig To check effectiveess of performace of chaels or parters ad advisors Bradig ad Reputatio To liste to customer feedback, social coversatios, or chatter ad actively desig commuicatio ad disclosure Figure 2: Applicatios of Setimet Aalysis Setimet aalysis has other applicatios i several segmets of the capital markets idustry, may of which are illustrated i Table 1. Fiacial Exchages Allows for efficiet market surveillace ad ivestigatio based o tredig ews ad rumors Permits better plaig by highlightig periods that have high tradig volumes or high market volatility Helps uderstad ew product ad service ideas from ivestor ad/or broker commuities Facilitates the creatio of idices ad the additio or removal of securities from the portfolio based o market setimet Brokers ad Traders Helps track market outlook before ad after policy aoucemets from govermets, cetral baks ad regulators Aalyzes the opeig ad closig figures, sigificat itraday evets ad major movemet of other market idices to gauge the market setimet Helps review the impact of ivestmet recommedatios o the market positios of participats Issuers Helps uderstad public setimet prior to iitial public offers Provides a glimpse of aalyst's setimets before fiacial results are aouced Helps track market behavior before ad after corporate actios Gauges fiacial market acceptability of products, services, ad satisfactio levels Aids with security pricig, premium determiatio, ad risk aalysis Ivestors Facilitates the selectio of stocks based o setimet aalysis (alpha stocks) Helps track portfolio performace Asset ad Wealth Maagers Helps idetify ew product ad service ideas from ivestor commuities Allows maagers to gauge the acceptability of products ad services, devise improvemets, ad moitor satisfactio levels Creates the opportuity to track the effectiveess of chaels ad parters, ad review the performace of advisors Table 1: Applicatio of Setimet Aalysis i Differet Segmets of the Capital Markets Idustry 3

4 The Future of Setimet Aalysis Iovative applicatios of setimet aalysis already exist. Exchages have used it for olie media moitorig, icludig stock specific recommedatios from various olie fiacial sources as well as rumors affectig markets. Baks have, i some cases, used setimet aalysis to uderstad the respose to a ew product or eve to decide the locatios of their ew braches. There have also bee istaces 1 where asset maagers, like Tashtego Hedge Fud, have used Twitter based aalysis to pick stocks for their fuds. As digitizatio ad social media evolve, so will the products ad processes for setimet aalysis. A lot of research is beig doe ad a variety of products have bee lauched; however, oly a hadful will be successful. The wiers are likely to offer the ability to coect to multiple data sources ad provide aalysis based o very specific cotexts ad parameters. The capability to highlight issues facig customers, geerate leads for customer acquisitio, ad use atural laguage processig for multiple laguages will also be immesely helpful. What Compaies Should Kow Before Implemetig Setimet Aalysis Setimet aalysis provides iovative ways to liste to users ad improve products ad services, but there are a few challeges i its implemetatio. Fiacial regulators are curretly developig comprehesive guidelies i this space. The geeral ature of these guidelies ad privacy issues, may force the fiacial idustry to be cautious about listeig ito social media. Mismaagemet of social media data ca expose firms to reputatioal risks. Maagemet ad effective resolutio of customer complaits o social media eed expert hadlig. Setimet aalysis is still evolvig ad the fiacial idustry is careful about ivestig i product licese costs ad programs cetered o setimet aalysis. For global orgaizatios, the aalysis tools eed to be equipped to hadle multiple laguages ad dialects, which also has cost implicatios. The success of the practice higes o removig oise aroud importat messages. The tools used should be itelliget eough to uderstad the overall cotext of the aalysis ad filter o-relevat data poits. Idetifyig the right data sources is a key challege for users ad solutio providers alike. A large part of the success of setimet aalysis projects depeds upo idetificatio of the right cotext ad data sources. Case i Poit: Setimet Aalysis at a Leadig Exchage ad a Global Ivestmet Bak Recetly, a leadig stock exchage udertook a setimet aalysis project to moitor stock specific recommedatios from olie fiacial sources. The idea was to collate ad verify the rumors about listed compaies from social media, leadig fiacial ews sites, ad regulatory sites. The exchage also wished to track updates ad iformatio releases from regulatory websites. The data gathered was used by the exchage s ivestigatio team to idetify suspicious trades ad stock movemets. A similar project at a leadig global ivestmet bak moitored setimets after its quarterly result were aouced. The dataset comprised of live tweets, seve days before ad after the aoucemet. It was aalyzed i relatio to the stock s price movemet. Positive ad egative setimets were captured regio wise. This helped the bak uderstad the setimets of ivestors ad other stakeholders ad pla strategies for future aoucemets. The Road Ahead Firms operatig i the capital markets idustry eed to cosider ad capture the opiios of idividuals ad digital commuities that discuss their products or services. The isights geerated ca be used to improve their brad, uderstad customer eeds, predict market behavior, ad aticipate key treds. There are certai challeges to setimet aalysis. However, capital market firms eed to work o icorporatig isights produced from such aalysis to retai cliets ad create profits. At this poit, it is most useful i geeratig sales-leads ad uderstadig how the market feels about certai products. Setimet aalysis is a useful tool that helps coect the orgaizatio with the ladscape they operate i ad better uderstad stakeholders they deal with. As it develops, the idustry will fid iovative ways to apply it to more busiess scearios ad provide greater value to users. [1] The Wall Street Joural, Firms Aalyze Tweets to Gauge Stock Setimet, July 06, 2015, accessed Jauary 15, 2016, 4

5 Further readig Aalytics i Capital Markets: Derivig Strategic Value from Data to Gai Competitive Edge About the Authors Gajedra Shirsat Gajedra Shirsat is a Busiess Cosultat with the capital markets group withi the Global Cosultig Practice (GCP) at Tata Cosultacy Services (TCS). With more tha 16 years of global experiece, Gajedra Shirsat has successfully led several strategic solutio cosultig ad implemetatio projects for leadig cliets i the fiacial services sector. He also provides cosultig services to cliets o issues related to wealth maagemet, asset maagemet, ad brokerage. Idra Chourasia Idra Chourasia is a Seior Busiess Architect with the capital markets group withi the GCP at TCS. With experiece spaig over 20 years, he has led ad cotributed to the coceptualizatio, solutio modelig, ad implemetatio of several global IT projects. He curretly drives offerigs related to market ifrastructure, clearig ad settlemet, custody, OTC derivative regulatios, brokerage, asset maagemet, ad digital iitiatives. 5

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