n Market report
News analytics No news is bad news
How news analytics are being used to create a superior trading experience.
Bob Giffords*
s e-trading competition increase the relevance and A intensifies, traders are recall of searches carried looking for ways to ‘get out.” Besides searching a smarter’. One way is to tap wide range of internal and into a new range of auto- external documents, users mated news flows, mining can also specify their own the text for trading opportu- websites to monitor BNP’s nities and threats. “Current LEOnard information portal. algos are really flying blind if Both ‘push and pull’ tech- they just use market data,” nologies are being used, but maintains Ryan Terpstra, traders want to go further to director of global news feeds drive their quant models at Thomson Financial News. directly with news and not just Brokers are attacking the market data. An early adopter problem head on using a new is JRC Capital Management generation of decision sup- Consultancy & Research in port tools that combine Berlin, a hedge fund that also search engines with text ana- distributes models for invest- lytics. “We are using text ment firms to plug into their mining to structure our trading systems. “A large information resources German bank, for example, according to our own com- has created a certificate prod- petitive intelligence catego- uct using one model,” says ries,” says Valérie Savin- Petra Ristau, head of research Abdelli from the economics and development at JRC. “To research department at BNP stay at the forefront we are Paribas. “By applying our investing heavily in natural own tags in terms of what language processing, together © Digital Vision interests us we can greatly with several partners.”
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The hedge fund’s man- “Algorithmic news feeds are primarily being agement is very committed n used by quants on the buy-side or by to text processing. “They have seen how fast markets investment banks, which use them for risk can react and how extreme that can be for certain news management. The feeds alert them to changes in and announcements,” says the markets that might cause them to suspend an Ristau. “Most technical quant models can’t cope algo or change its parameters.” with large moves in volatility Ryan Terpstra, director of global news feeds, Thomson Financial News or market rises or falls.” JRC’s aim is to get an early “Traditional vendors like Dow ly this will ever match a spe- warning system that they can Jones and Reuters have cialist trader’s experience and use alongside their technical launched low latency news detailed understanding of the and fundamental analysis. flow offerings with some content. So traders will have Early results are promising, annotation,” says Michael to deploy the technology on a but sometimes surprising. Kearns, professor of computer large scale, achieving slightly Ravenpack, based in Spain, and information science at the better than chance over thou- provides the artificial intelli- University of Pennsylvania, sands of stocks, some thinly gence engine behind the Dow and head of a quant team at traded. That implies a lot of Jones News Analytics service, Banc of America Securities. heavy lifting.” Kearns would offering sentiment analysis of “There are also new entrants like to see much more empha- their news flow. They analysed like Relegence and Monitor sis on fact extraction. and charted the Dow Jones 20- 110, which mine the web and Some, like Dow Jones and year news archive, classifying blog space, as well as local, less Ravenpack, offer market senti- the stories as being S&P posi- accessible or more specialist ment indicators. Reuters has tive, negative or neutral. “What information sources,” he joined forces with Infonic, for- you get looks incredibly like observes. merly Corpora, to offer a soft- the S&P 500 index,” says Phil Approaches differ. The ware product for measuring Gagner, CTO. “Is it exact? No, basic services provide a stream sentiment that can be applied but strikingly similar.” of low latency metadata in to any data feed. XML format to categorise or “Traditionally, this process had Mining the flow tag the articles and extract been performed by a human Natural language processing some key facts like economic linguistic analyst in the PR/ has matured greatly in the last or corporate results or fore- marketing industry, at about few years, and the race to casts that trading algorithms six articles per hour,” says launch news flow products is can act on. “Current vendor Richard Brown, business man- now on. Investment firms can offerings are focused mainly at ager, Reuters NewsScope. “Our now either do this in-house the document level, classifying system is designed to score using text analytic software or the overall intent of an article about 10 articles per second buy pre-processed data servic- and pulling out a few facts,” and can scale to handle even es from the vendors. says Kearns. “It’s most unlike- the highest news flow volume,
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banks, and expects to launch it “Today, algorithmic news in the first quarter next year. feeds are primarily being used “We are focusing on extracting by quants on the buy-side or facts rather than assigning our by investment banks, which own view on sentiment,” says use them for risk manage- Terpstra at Thomson. “We’ve ment,” says Terpstra. “The heard very different views on feeds alert them to changes in sentiment analysis. Our cus- the markets that might cause tomers prefer to draw their them to suspend an algo or own conclusions on sentiment, change its parameters.” for example, by comparing an Much more, of course, is earnings per share announce- promised. “An economic event ment to our First Call esti- such as a better-than-expected mates database.” consumer confidence report Fact extraction requires the can kick off a basket trade to which typically occurs during “[News software to carefully map out purchase retail stocks and earnings season. This makes n analytics] the linguistic structure of the rotate out of other positions,” the analysis applicable to a can help an document and use other infor- says Brown at Reuters. “It can wide array of use cases, includ- algorithm to get mation sources to confirm and be done within milliseconds, ing algorithmic trading.” better behind improve the semantic interpre- saving valuable basis points on the scenes, tation. “We are integrating our the transactions.” Gauging sentiment they can help news with Thomson’s Kearns, who has been the client filter Running sentiment analysis Quantitative Analytics product researching machine learn- the news and software in-house gives con- identify what is suite,” says Terpstra, “to deliv- ing and computational trol. “The output of the sen- important, and er news that is correlated and finance for some years, timent engine is very robust can help the normalised to other content agrees: “For algo trading, and each client may inter- client select the sets including fundamentals, news flow can give tangible pret the results differently,” right algorithm estimates, ownership and his- benefits by listening for key says Brown. “Weighting by to use in the torical tick data.” The platform events or recognising market news source, particular indi- pre-trade will be data agnostic, so it will reactions to such events.” cators, or combinations of assessment of contain content from indicators, as well as varying market Thomson and third parties. Assessing the potential the lag times to market reac- conditions.” Terpstra believes this is very HSBC is still in a research and tions and constructing pro- Tom Middleton, important to quants that need development phase on news head of European prietary trading baskets, are algorithmic to see a comprehensive view at flow, reviewing vendor offer- just a few ways the sentiment trading, Citi any time. ings and exploring use cases. information can be highly All the vendors will pro- “The real challenge will be personalised.” vide a historical archive for assessing return versus invest- Thomson Financial News is back-testing and more or less ment,” says Kevin Bourne, developing its own news flow integration with other data, global head of equities execu- together with a number of including synchronisation of tion, HSBC CIBM. “Is this hedge funds and investment timestamps and symbology. going to become just another
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layer of complex IT engineer- our own algorithms. For this ing which does not deliver a we’ll use different approaches clear net dollar benefit?” Such from simple heuristics, which caution is widespread. have a lot of merit, to com- One investment bank plex neural nets and genetic ready to move forward is searches to provide automated Citi. “We have just finished adaptive learning.” a due diligence, reviewing Meanwhile, the interest vendors of news flow analyt- grows and third party OMS/ ics and the kinds of analysis EMS vendors are beginning we should apply to them,” to incorporate the feeds into says Tom Middleton, head their platforms. “In June we of European algorithmic announced a dedicated trading at Citi. “We will now adapter to allow users to engage with one vendor and integrate the Dow Jones ‘ele- add this to our algorithmic mentised’ news feed into the “Is this including both technical and trading offering in the com- Apama trading platform,” n [news fractal analysis to deal with the ing months.” There are three says Dr John Bates, founder analytics] going high impact low probability ways news analytics can and vice president, Apama to become just events. Our current research affect customer trading strat- Products, Progress Software. another layer of starts with the numerical side, egies, explains Middleton: “Customers can now drive complex IT looking at trends, phases and “[News analytics] can help the news flow into their engineering turning points, and then push- which does not an algorithm to get better quant models directly with- es back into the text to identify deliver a clear behind the scenes, they can out programming.” Others net dollar signals that we could use to help the client filter the news will probably soon follow. benefit?” predict them.” and identify what is impor- Kevin Bourne, Middleton at Citi is in no tant, and help the client to News flow algorithms global head of doubt about the challenge. equities execution, select the right algorithm to “There is a lot of experimenta- HSBC CIBM “Because of the richness of use in the pre-trade assess- tion and fiddling around with the semantic content of news ment of market conditions.” news flow,” says Kearns, “but feeds,” he says, “our models While Bourne has still to there are no reports of any will become much more be convinced of the economic serious or successful applica- complex and we will need benefits of what is currently tions.” It will take time to mar- more bandwidth and hard- on offer, Middleton clearly shal the wide range of tools ware to handle it.” It will take believes that at least one ven- and skills needed to make news time to build the ontologies, dor’s offering is good enough. flow algorithms a reality. the dictionaries used to inter- “Rather than carry out the “We are probably still a pret the text, to design and textual analysis ourselves,” year away from production,” calibrate the models, and to says Middleton, “we shall take says Ristau at JRC. “We have assess what works and what the news vendor’s text analyt- built an infrastructure to inte- does not. “Everything is hap- ics and focus on the overlay grate the news and market sen- pening faster,” says Bates. level, integrating his data with timent with our quant models, “Natural language processing
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will only accelerate this trend, “Our system affecting all sorts of different n is designed instruments and adding to to score about their volatility.” 10 articles per Kearns reminds us to take second and can a game theoretic view of scale to handle even the markets. “What makes trad- highest news ing sense depends on what flow volume, others are doing,” he says. which typically “Alpha can only be generat- occurs during ed in the context of one’s earnings opponents. If everyone uses season. This similar models, everyone makes the loses, as we have seen with analysis the recent credit squeeze.” applicable to a So while some initial success wide array of stories may start appearing use cases, including in the next six to 12 months, algorithmic real change is likely to be trading.” measured in years. What is Richard Brown, clear is that news flow algo- business manager, rithms are now a reality to Reuters NewsScope be reckoned with. n *Bob Giffords is an independ- ent banking and technology analyst. [email protected]
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