The financial industry has been notoriously slow to embrace the full potential of social media. After all, the sector is very tightly regulated, so it’s tricky for companies to give their employees online freedom while obeying the letter of the law.

But as the financial industry gets its footing, businesses are starting to take advantage of social media’s amazing capabilities. Many industries have been able to reach new clients or provide customer support through Facebook, Twitter, and their brethren — but the financial world has some even more high-tech things it can accomplish. Here’s a look at how high finance may see radical changes, thanks to the power of social media.

Twitter as a Stock Market Predictor

One of the latest features Twitter offers to businesses is the so-called “cashtag.” Just as you can use a hashtag as a way to link to a commonly used word or phrase, you can now see tweets about a particular stock by putting a dollar sign in front of its stock symbol (i.e.: $GE). It’s a way to get more context for a stock’s activity and the reactions to its performance.

Research has also shown that the public response on Twitter correlates with changes on the stock market. Indiana University’s Johan Bollen identified the link between Twitter impressions and stock performance, and Derwent Capital Markets of London used his system for the world’s first Twitter-based hedge fund, called the Absolute Returns Fund. After just a month, the hedge fund had a 1.86 percent return — a better result than most hedge funds.

If that test case is indicative of the potential for Twitter or other social media channels to forecast the actions of the stock market, then the financial industry stands to reap huge benefits by learning how to read the public response.

Partnerships Filling New Niches

The interest in understanding and analyzing data from social media has created a new, specialized need to be filled. Twitter has arrangements with a very small number of partners, allowing them to access the network’s treasure troves of data. One of those companies is DataSift, a real-time mining platform for social data that recently added two financial experts to its team. DataSift’s new employees will help make it easier for fund managers to make their decisions with the help of public opinions from social media channels.

Other new partnerships may fill a different niche created by the finance world’s entry into social media: risk management. One such deal was forged earlier this year, combining enterprise social media management provider SocialVolt with DigitalMailer, a company that has digital communication offerings for financial institutions. This arrangement uses SocialVolt to monitor and archive communications on Facebook or Twitter for better risk management and fast response to customers.

Employees Reaching Out To New Clients

Some companies have recently started permitting their financial advisers to create accounts on popular social media channels. In June this year, Morgan Stanley Smith Barney opened up Twitter and LinkedIn to its 17,000 advisers after the company trialed accounts for a year. During the pilot of 600 advisers, 40 percent said they were able to bring in new clients through their use of social media.

“It’s a new thing for the industry and it’s a new thing for our company,” said Lauren Boyman, Morgan Stanley’s director of digital strategy. “It just takes time to get this done and make sure that we are supervising it in a way that’s up to the standards of the firm.”

Raymond James Financial Services has also pushed for its representatives to create accounts on LinkedIn, Facebook, and Twitter. Mike White, the company’s director of marketing, said it was important to consider social media “an extension of a communication and marketing strategy.” The company partnered with Actiance to give its workers a clear channel for reaching out to new clients. That arrangement gives Raymond James employees a set of preapproved topics that have met compliance requirements.

What do you think about the potential for social media in high finance? Let us know in the comments!

[Image credit: Refracted Moments, Ken Teegardin, Nomadic Lass, Allan Edwards]