firms that focus on measuring the news sentiment coming from social networks such as
Twitter and Facebook as well as influential blogs.
Blogs and social networks, especially, have the ability to spread rumors regarding new
products at very high speeds. Multiple examples of how fast news can spread through
these news channels have come from highly hyped products such as smartphones,
games, electronics, and even movies.
One of the results of the rumors spread through these new channels has been a
dramatic change in investors’ expectations regarding the future earnings of the business.
4.6 Regulated vs. unregulated news
While news related to publicly traded businesses could be classified in many ways, there
are really only two main categories that should matter: regulated news and unregulated
news.
4.6.1 Regulated news
The Securities and Exchange Commission (SEC) regulates just about every aspect of the
information that a business which is publicly trading on an US exchange releases into
the market.
On August 15, 2000 the SEC adopted regulation FD (Full Disclosure) which is the US
government’s attempt to control the release of material non-public information from a
publicly traded company to the public.
The SEC does not define the term ‘‘material’’ but gives an interpretation that:
‘‘Information is material if ‘there is a substantial likelihood that a reasonable
shareholder would consider it important’ in making an investment decision. To fulfill
the materiality requirement, there must be a substantial likelihood that a fact ‘would
have been viewed by the reasonable investor as having significantly altered the ‘‘total
mix’’ of information made available.’ Information is nonpublic if it has not been
disseminated in a manner making it available to investors generally.’’
The SEC defines ‘‘public disclosure’’ as:
‘‘...issuers could meet regulation FD’s ‘public disclosure’ requirement by filing a
Form 8-K, by distributing a press release through a widely disseminated news or wire
service, or by any other non-exclusionary method of disclosure that is reasonably
designed to provide broad public access—such as announcement at a conference of
which the public had notice and to which the public was granted access, either by
personal attendance, or telephonic or electronic access.’’The SEC also regulates the release of information that deals with insider trading, the
issuance of new securities, as well as trading ‘‘on the basis of’’ material non-public
information. It is interesting to note that the SEC has argued that:
‘‘...a trader may be liable for trading while in ‘knowing possession’ of the
information. The contrary view is that a trader is not liable unless it is shown that
he or she ‘used’ the information for trading. Until recent years, there has been little
case law discussing this issue. Although the Supreme Court has variously described an112 Quantifying news: Alternative metrics