The Wall Street Journal writes about how hedge funds and proprietary traders are working to automate trading based on social media information and sentiment.

Some traders use message boards, StockTwits and Google Insights to “get a handle on the buzz for stocks they are trading,” says the report. Meanwhile, StreamBase Systems Inc. provides tools to trade on information in Twitter posts.

And starting Tuesday, Alacra Inc. will launch PulsePro, a technology suite that several investment funds have been testing for sentiment-based automated trading.

Writes the Journal:

Through backtesting, Alacra has found the ratings generated by its product can lead movements in stock prices by about one to three weeks for large-capitalization stocks. In turn, hedge funds and proprietary traders are interested in the feed despite that it won’t work anywhere near the lightning-fast speeds they’ve been achieving for much of their other computer-based trading.

“This is part of a larger trend to utilize unstructured content as an input for various types of trading signals,” said Paul Rowady, senior analyst at Tabb Group, a financial-markets research firm. He said while the trend began primarily with content from news organizations, social media represent “a natural extension of the trend.”

Of course, the issue of noise and information integrity features prominently in the story.  The article quotes Ben Cathers, social media manager at Lightspeed Financial saying:  “A lot of these blogs are one-person editorial teams. They don’t have the benefits of a 500-person news team fact-checking everything they say, and yet they have this incredible influence on a company’s direction.”

It’s all interesting stuff. And I think it’s only going to become more interesting in time.

Think about automated trading based on real-time XBRL filings, or  — even more interesting to me – trading based on real-time activity data sold by social media vendors. Or how about including in fundamental analysis things like Twitter followers, Facebook fans and page views.

All of this online activity becomes highly relevant data.

Here’s the WSJ article again: #Trend: Trading on Social Media

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• Turn your dull investor relations PDFs into branded embeds

DOCSTOC, the free document sharing service, has rolled out a new branded embeddable document viewer that can help to improve the usability of PDF-laden investor relations websites.

While several other document sharing services let companies convert their PDF and Office-format reports into more engaging online documents, Docstoc is the first to let all users customize the look and feel of the Flash-based embeddable viewer, according to Techcrunch.

Considering that investor relations vendors are billing companies thousands of dollars to convert PDF reports into Flash and image-based documents that have fewer features and lower usability than Docstoc’s free viewer, I think Docstoc is an obvious option for IR departments.

To show you what the branded Docstoc viewer can look like, I created one  for IR Web Report in about 1 minute. I am using it below for an embeddable version of UBS AG’s 2009 Annual Review, which the company posted on its investor relations website today in PDF only.

UBS Review 2009

From a compliance perspective, Docstoc’s format can help companies meet the Securities and Exchange Commission’s usability requirements for annual reports and proxy statements.

Importantly, Docstoc’s documents are searchable and analysts and investors can copy text from the documents for reuse in their own reports.  Flash and image-based document conversion packages from vendors like Broadridge, Computershare, Thomson Reuters, Shareholder.com and many others, do not  support easy text extraction.

And since the Docstoc viewer can be embedded on any website, financial blogger/analysts can grab complete company branded reports to use as collateral for their articles, much as I have done above with UBS’s 2009 review. The ready availability of embeds for company information may help to attract more coverage by online finance writers and bloggers.

Like other document sharing services, including Scribd, issuu, and SlideShare, converting PDFs and Office documents in Docstoc is extremely easy. At the simplest level, you open an account and upload your documents from your computer. The conversions typically are ready for embedding in a few minutes.

It is important, however, to understand how embeddable documents interact with search engines and the impact this can have on your website’s traffic and visibility. Document sharing services also offer advanced features that you should consider using.

To learn more, visit Docstoc’s website.

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UNDER the U.S. Securities and Exchange Commission’s controversial notice-and-access (N&A) process for the delivery of annual meeting materials, companies can mail their shareholders a slip of paper containing a URL where recipients can access their proxy materials online.

Moody’s Corporation (NYSE:MCO) is one company that is in the process of sending such a notice to its registered shareholders, part of which reads like this:

Please visit http://www.amstock.com/ProxyServices/ViewMaterial.asp?CoNumber=26180, where the following materials are available for view:

•     Notice of Annual Meeting of Stockholders

•     Proxy Statement

•     Form of Electronic Proxy Card

•     Annual Report on Form 10-K

Now remember that people are getting this on paper and they have to manually key in that long URL –http://www.amstock.com/ProxyServices/ViewMaterial.asp?CoNumber=26180

If ever there was a disincentive for people to go online to read the annual meeting materials and cast their votes, it’s the prospect of typing in such a long URL.

No support for user error

Even if shareholders do resolve to give the long URL a go, the chances are high that they’ll make a mistake on the first try. And if that happens they’ll get a generic error screen like the one below.

What’s infuriating about the above generic error page is that it would be a piece of cake for Moody’s and its transfer agent, American Stock Transfer and Trust Company (AST), to set up a custom error page. If they did this, investors who type in the wrong URL will get something useful that helps them complete the task for which they came.

Oh, I don’t know, how about an alphabetical list of AST’s proxy clients so that shareholders can find the company they’re looking for and then retrieve the materials and vote.

But they can do even better than that.

How hard is it to shorten a URL?

Moody’s and AST could easily help to prevent people from making mistakes in the first place. It would be a second piece of cake to set up a redirect to a shorter, more memorable URL. You know, something like http://amstock.com/moodys Honestly, it’s a 1-minute job!

And even if AST is so slow that they can’t do custom domains for their clients, then Moody’s could have done what everyone on Twitter has learned to do and used a URL shortener.

In less than 5 seconds, they could have turned http://www.amstock.com/ProxyServices/ViewMaterial.asp?CoNumber=26180 into http://bit.ly/daYkmx. Not the best solution, but still much better than that awful long URL.

SEC not enforcing format requirements

On a related note, why is the SEC letting companies like Moody’s get away with posting their proxy materials in half-baked, barely usable formats? Together, Moody’s annual report and proxy statement run to 214 pages, but they’re only posted in PDF with no navigation support, not even a bookmarks panel.

That’s not in keeping with what the SEC outlined in it’s adopting releases for Notice and Access, yet the regulator seems content to let things slide. All it would take is one or two well-placed comment letters to a couple of prominent issuers asking about their compliance with the format requirements and the entire industry would get a clue.

It’s important for the SEC to do this otherwise even the most motivated retail shareholders are going to become discouraged. Imagine, after making an effort to manually type in that long URL, and possibly making an error on the first try,  Moody’s shareholders get to download a bunch of slapdash PDFs.

As online experiences go in the age of YouTube and Facebook, that’s akin to a root canal. It will make people prone to ignore the next notice that arrives in the mail.

And when that happens, the 75% drop in retail shareholder participation in N&A-based meetings might deepen and become permanent.

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A NEW survey sheds light on the growing independent investment advisor business in the United States and finds that these advisors have little interest in small-cap stocks and prefer large-cap international equities, exchange traded funds (ETFs) and large-cap domestic stocks.

The Charles Schwab Winter 2010 Independent Advisor Outlook Survey was completed by more than 1,100 advisors with with more than $252 billion in total assets under management custodied at Schwab. The average advisor in the survey has just over 300 clients whose average age is about 60. Half of their clients have accounts of less than $1 million, with a mean account size of $1.48 million.

The study also finds that consumers are continuing to leave bulge-bracket brokerages in favor of the estimated 33,000 registered independent investment advisors (RIAs) in the U.S., with 92% of advisors saying they won new clients in the last 6 months.

Interestingly, 46% of these new clients were previously served by full-service wirehouse advisors, and 65% of advisors say new clients moved because they had “lost trust” in their previous advisor.

Fully 86%  of advisors surveyed say being independent gives them an edge over full-service brokerage advisors, while 83% say their role as a fiduciary helps them win new business.

ETFs, large-cap international stocks favored

ETFs are the preferred investment vehicles for advisors surveyed, and 36% plan to invest more in ETFs during the next six months. Internal Schwab data indicates that more than 70% of the 6,000 advisors who custody assets with Schwab are using ETFs.

To achieve additional ETF allocations, advisors say they will pull mostly from cash (37%) and mutual funds (33%). After ETFs, commodities ranked second in popularity (18%), followed by mutual funds with hedging strategies (17%), precious metals (14%), REITs (13%), real estate (11%) and separately managed accounts (11%).

Following a trend first seen in July 2009, advisors are continuing to gravitate toward large-cap equities — particularly international large-cap. One-third say they plan to invest more in emerging market large-cap stocks, while another 28% say they intend to invest more in large-cap stocks from developed markets.

Just 26% expect to increase their investments in U.S. large-cap stocks and only 16% plan to increase investment in U.S. small-caps.

Meanwhile, only 16% plan to invest more in fixed income, compared to a high of 42% in January 2009. About 35% of advisors expect to invest less in cash, and only 10% plan to invest more, compared to a high of 28% in January 2008.

The complete survey report can be downloaded at http://www.aboutschwab.com/media/pdf/advisor_outlook_10.pdf

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This is a complicated post, but I know that some people in the IR profession are very interested in this right now.

First, I am on record on this blog as saying that until Twitter is more secure, investor relations departments should steer clear of using it as a news dissemination channel and use it instead only for engagement.

Basically, my view has been that if you suggest to investors that they can use your Twitter account for news alerts, then you should expect them to trade on that news — including possibly fake news sent by hackers.

But if you instead use Twitter only for engagement and caution investors against relying on your account for news updates, then you mitigate against the negative fallout that will follow if your account is hacked.Of course, in practice it’s almost impossible to engage with users on Twitter and not post news.
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Now it is very important to understand Twitter’s security history and how that was factored into my views on using Twitter for IR. The service has been plagued with problems, both in terms of availability and security. Twitter downtime is no longer the big problem it once was. In fact, I no longer worry about Twitter’s availability. You can see why here.

However, it’s the security of Twitter’s technology that has been my primary concern. I’ve kept track of various security breaches and have documented dozens of separate incidents. The early incidents were what really concerned me because they all related to Twitter’s technology infrastructure being hacked.

The worst case in my view was the Mikeyy worm in April last year. In that case, merely visiting the profile of a compromised account on the Twitter website while logged in to Twitter resulted in your account being infected. In other words, it was extremely easy to be hacked, and short of not going to Twitter.com at all, there was no way to protect yourself. In fact, I fell victim to this, the only time I’ve ever fallen prey to something like this.

Now, remember that a few months earlier, in January 2009, 33 prominent Twitter accounts, including those of Barack Obama and Britney Spears, were hacked and offensive public messages sent from them to their followers. The hacker exploited a hole in Twitter’s technology to gain access to the accounts. To my mind, Mickeyy coming after the President of the United States’ account had been hacked suggests that Twitter management didn’t really take security of the service seriously between January and April. I mean, what could be more serious than the President’s account being hacked? Surely, they would have pulled out all the stops to plug the holes? And yet, along came Mickeyy in April and made a mockery of Twitter.

So, yeah, at that point, there was no way in hell that I was going to put my reputation on the line for Twitter and tell my investor relations clients that it was safe to use Twitter as a news alert channel. Mock me as a philistine in you want, but I’ll never put my clients’ reputations at risk for the sake of seeming trendy.

Since April 2009, there have been a number of security breaches on Twitter. Perhaps the most serious was in December 2009 when the site was taken down by Iranian hackers who appear to have guessed Twitter’s password at a third-party service that manages Twitter’s DNS servers. This was not an exploit of Twitter itself, but rather weak security practices by Twitter staff in managing their own accounts on other services.

There have also been a number of phishing attacks that have led to Twitter accounts being compromised. In fact, just this week, Intel Corp.’s UK Twitter account was hacked, as was Home Depot’s. In the case of Home Depot, the account is used for investor relations information. The video below explains how these accounts are compromised.

Importantly, though, none of the attacks since April have been of the Mickeyy variety and most have been phishing scams. There’s a big difference between a hacker exploiting holes in Twitter’s code and hackers exploiting human fallibility through phishing scams. While we have no control over Twitter’s code, we do have control over our own behavior, so I don’t worry too much about phishing scams because you can teach people how to avoid them.

Given that I haven’t seen anything for months that would cause me to worry about Twitter’s security, I’ve had to revisit my views on whether IR departments should use Twitter for news alerts. I take some additional comfort in the fact that some high profile Tech leaders have recently started Twitter accounts, Bill Gates and Google CEO Eric Schmidt, for instance. I have to assume that they wouldn’t take a chance on Twitter if they thought it wasn’t secure.

I now believe that Twitter is secure enough to be used for news alerts, as long as news is distributed on Twitter simultaneously to other channels. You cannot invite investors to follow you on Twitter and then be tardy in updating your feed.

Of course, as we’ve seen this week, security risks remain. Scammers will increase their attacks on social networking sites as they become more popular, and it’s possible that official corporate accounts will become prime targets. However, following some basic good practices should minimize the risks. Twitter suggests the following basic practices:

• Use a strong password.
• Watch out for suspicious links, and always make sure you’re on Twitter.com before you enter your login information.
• Don’t give your username and password out to untrusted third-parties, especially those promising to get you followers or make you money.
• Make sure your computer and operating system is up-to-date with the most recent patches, upgrades, and anti-virus software.

I’d add one more tip. Use a short URL expander extension in your browser or Twitter client. Since Short URLs mask the actual address of a link, it makes phishing scams somewhat more likely to succeed. Short URL expanders show you the full URL of the link, so you can see where they lead before you click them. Short  URL expander extensions are available for Firefox and Chrome (not sure about the others).

In summary then, I think Twitter is secure enough for IR news dissemination purposes but remember that nothing is ever going to be 100% secure. And the biggest thing to worry about it not Twitter’s technology but rather you or your clients’ own gullibility.

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• If tweets had disclaimers

TWITTER is fast becoming an important channel for public companies to communicate with investors, but the platform’s 140-character limit for messages creates compliance challenges that may be preventing more companies from participating.

In many situations, regulated communications require disclaimers or warnings that don’t fit into Twitter’s character limit. While most of the 600-odd public companies we are tracking on Twitter seem to either ignore or openly flout legal considerations, companies that do take compliance seriously are hamstrung by Twitter’s inflexibility.

In this article I suggest that Twitter could remedy the problem by attaching a disclaimer link to the metadata that accompanies each tweet on the Web and the API. The addition of a disclaimer link to individual tweets could provide a compelling reason for more companies to join the service and for existing businesses to upgrade to paid accounts.

Current ineffective workarounds for disclaimers

For public companies that use Twitter, legal concerns include compliance with the adoption and endorsement rules for third-party content, forward-looking statements, and non-GAAP financial measures. Companies in certain industries, such as financial services and pharmaceuticals, also must contend with other regulatory constraints when communicating via Twitter.

Since it is currently impossible to include disclaimers with every tweet due to Twitter’s limits on message length, well-meaning companies that take their compliance obligations seriously have attempted to use workarounds to apply disclaimers to their communications on Twitter.

However, in all cases these fail to ensure compliance because people can access companies’ tweets without ever seeing the relevant disclaimers or having direct access to them. Companies currently use one or more of the following ineffective methods when attempting to apply legal cautions to their tweets:

Twitter backgrounds

Some companies add disclaimer text to their Twitter account background images. The problem with this is that many users will never see the disclaimer on a company’s background image because they do not need to use the Twitter website to follow its tweets.

People can follow a company via one of many popular Twitter clients like TweetDeck, Seesmic or Tweetie, which means they will not see the company’s profile page that contains the disclaimer on the background image. Twitter backgrounds also do not appear on Twitter’s mobile site.

And even if people do use the Twitter website to follow the company, they still might not be properly cautioned. Any disclaimer on a Twitter background is likely to be incomplete and require people to visit a fuller version on the company’s website. However, no hyperlink can be provided without users installing special software since the disclaimer is part of an image.

It’s also worth noting that even if people do visit a company’s profile page on the Twitter website, they still may not see the disclaimer text if their browser window is set to a small size, if they have images disabled, or if they’re using a screen reader.

Consequently, adding disclaimers to Twitter backgrounds is almost entirely ineffective, although one should not blame companies for trying this approach because they have little choice.

Cliffs Natural Resources (NYSE:CLF) warns users on its background image not to rely on Twitter for timely updates, but many people will never see this important notice when they subscribe to the company’s tweets.

Twitter bios

A few companies use their one-line Twitter bios to try to caution their followers or make them aware of a disclaimer. This approach is slightly more effective than putting disclaimers on Twitter backgrounds because bios are more visible. Bios typically are included in the profile information on Twitter clients such as TweetDeck, whereas company backgrounds are not.

However, users of these Twitter clients still can follow company accounts without ever viewing a company’s bio information, which means they may never become aware that the tweets are subject to a disclaimer. Twitter restricts bios to no more than 160 characters, which does not leave much room for an effective caution.

Companies can provide a short URL for a fuller disclaimer in their bios, but people will have to copy or manually type in the address because links in bios are published as text instead of hyperlinks. Overall, using Twitter bios for disclaimers is ineffective.

Disclaimers in Twitter bios don't ensure that users will see them when viewing individual tweets in isolation.

Tweeted disclaimers

eBay Inc. famously uses a set of four disclaimer tweets prior to “live-tweeting” its earnings calls (see screenshot below). These link to a more complete disclaimer on the company’s corporate blog and to the investor presentation that contains the GAAP reconciliations.

These four tweets precede eBay's live tweeting sessions. However, there's no assurance that people will see them.

While the company’s lawyers deserve credit for recognizing the potential legal pitfalls of using Twitter in this way, there is no assurance that investors will be aware of the disclaimer when they view individual tweets from the live session.

For example, investors who access the tweet shown below via a referral from a friend or from search results will not be cautioned about forward-looking statements as required for the company to claim safe harbor.

This forward-looking tweet is not accompanied by cautionary language.

How Twitter could add disclaimer links to tweets

The fundamental problem with current approaches to applying disclaimers or cautions to tweets is that people can view tweets in isolation from the disclaimers that apply to them.

To address this problem, Twitter could add a new “disclaimer” parameter that could appear below each tweet and link to a page containing a comprehensive disclaimer. This would be similar to the new “contributors” parameter that Twitter is currently testing for business accounts.

The new contributors link is meant to personalize business accounts managed by multiple people by showing which contributor wrote the tweet. Twitter itself is using the contributors link on its account, as shown in the following tweet.

Importantly, the contributors link is retained when tweets are re-tweeted on Twitter’s website (but not when the RT convention is used).

While I’m sure the contributors link is valuable to business users, I’m even more sure that a disclaimer link for tweets would be just as attractive, if not more so.

Companies that are currently sitting on the Twitter sidelines for legal reasons will have more confidence to use Twitter if they can reliably attach legal disclaimers to their tweets.

And the disclaimer feature is something worth paying for if it means avoiding costly litigation or regulatory action.

Here’s what a disclaimer link might look like:

Just a thought.

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