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Quantitative Trading on News and Social Media Content

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Quantitative Trading on News and Social

Media Content

Presentation by:

Armando Gonzalez

President & CEO - RavenPack

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Outline

Outline

• About News Analytics in Finance

• Do people really trade on News Analytics? And Twitter? • Opportunities & threats with Twitter in finance

• Does investing on Twitter actually work?

• Who breaks news first: Traditional or Social Media? • Who breaks news first: Traditional or Social Media? • Concluding remarks

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Where are News Analytics used?

Where are News Analytics used?

Quantitative investment and trading – receive timely signals or raw data to build custom signals & models across all asset classes and trading frequencies

Portfolio management – improve asset allocation decisions by benchmarking sentiment towards market, sector, or asset class

Automated market making – widen spreads, tilt, add/remove liquidity or pull quotes when there is significant news impacting activity in a particular security

Research & analysis – help forecast stock, sector, market, and global outlooks

Execution algorithms – create circuit breakers or develop algorithms to help predict liquidity, volatility, and directional movements caused by news

Market surveillance & risk management – systematically detect events where market abuse may have occurred, mitigate event risk, build early-warning systems

Discretionary trading and investing – create directional or timing indicators for use

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Do People Really Trade on News?

Do People Really Trade on News?

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Do People Really Trade on Twitter?

Do People Really Trade on Twitter?

• Still at its very early stages. Most work is done in R&D Labs rather than on the trading floor!

Derwent Capital Management - The Twitter Fund • Launched with $40 million in July 2011

• Closed down in August 2011 after 1 month

• The Twitter fund was launched based on the (in)famous research paper by Johan Bollen et.al.: “Twitter predicts the stock market”

• Calm & Happiness are predictive of the overall market (DJIA) • Achieved a correlation of 86.7% with daily returns

• Critique: no one has been able to reproduce these results • Closed down in August 2011 after 1 month

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Twitter Challenges

Twitter Challenges

• Spot business and economic trends before the rest of the world can

• Use the +100 million active twitter users as your eyes and ears on world events

• Position yourself into a trade before the news gains traction to the wider public

• Instant access to the sentiment of the masses

• Twitter, Facebook, LinkedIn OK for corporate disclosures, SEC says • Twitter introduces an alert system for emergencies and disasters in

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Influential Accounts

Influential Accounts

• Most Twitter users have little influence beyond their networks but a few have a real audience

For example, Barack Obama has over 36 million followers and ranks # 4 worldwide.

Oh right… Justin Bieber ranks #1 with over 44 million followersBill Gates ranks #44 with over 12 million followers

Donald Trump (@realdonaldtrump) has over 2.3 million followers, Top

1000 account

Carl Icahn has about 75,000 followers, has published less than 20 tweets

The top news organization on twitter is CNN with over 13 million followers, ranks #35

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Verifying Accounts

Verifying Accounts

• On Twitter, a verified account has a blue badge indicating Twitter establishes the authenticity of the identity of the individual or brand

• Twitter verifies highly sought users in music, acting, fashion, government, politics, religion, journalism, media, advertising, business, and other key interest areas

• Twitter does not accept verification requests from the general public

• Linking to your Twitter profile from an official website is the easiest way to confirm the authenticity of your Twitter account

• Without some form of authenticity check, twitter accounts could be fake, fraudulent, and dangerous

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Text Mining Challenges

Text Mining Challenges

• Twitter tends to have its own language (OMG, LOL, #APPL, @hottie, etc.) • Hard to distinguish between real events and fictional ones

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‘Klout’ Matters

‘Klout’ Matters

No price movement on Apple (APPL)

Icahn’s comments move APPL stock price

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‘Klout’ Matters

‘Klout’ Matters

16:00 ET - Market Close

Apple ends up 5% Carl Icahn discloses ‘large’ stake in Apple via Twitter

14:21 ET - @Carl_C_Icahn (Twitter)

“We currently have a large position in APPLE. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come.”

14:24 ET - Dow Jones Newswires

Icahn Says on Twitter He Has 'Large' Position In Apple

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Threats with Twitter and Trading

Threats with Twitter and Trading

• Lots of tweets are garbage – scam artists and market

manipulators

• Law enforcement worldwide has issued alerts to media outlets to beware of compromise by hackers

• For example, the Syrian Electronic Army (SEA) claims responsibility for the takedown of big media sites: NY Times, Washington Post, FT, NPR, and Twitter feeds from Reuters, the AP, and BBC weather service

disruption

• “Hactivist” groups plan to hijack social media accounts to spread propaganda and misinformation

• As twitter user accounts gain popularity, the security risk becomes even greater

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Twitter Security Threats: Timeline

Twitter Security Threats: Timeline

“Father of the Internet” Vint Cerf’s account hacked (Dec 10, 2008)

Twitter domain temporarily hacked by Iranian Cyber

Army President Obama

Twitter account hacked

2009 2010 2011

Australian’s Telstra’s Twitter account hijacked

BP Twitter account hacked, jokes about oil continues spewing

from Deepwater Horizon oil well North Korea’s official

government Twitter account hacked to call for uprising to remove leaders from power

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Twitter Security Threats: Timeline

Twitter Security Threats: Timeline

NBC News Twitter hacked

Tweets allege another attack on ground zero

Lady Gaga’s Twitter hacked

Promising special Lady Gaga edition Ipads and free Apple Macbooks

Don’t forget Justin Bieber.

Hacker “unfollowed” 122,000 accounts the singer follows

2011 2012 2013

Thai PMs Twitter account hacked

False tweets accused her of cronyism and failures

U.S. Senator Grassley Twitter account hacked

Publishing endorsement for the hacker group Anonymous

Reuters suffers second hack

Fake Twitter account posts pro-Syrian government messages

Pranksters deface Burger King’s Twitter

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Twitter Security Threats: Timeline

Twitter Security Threats: Timeline

The Daily Telegraph twitter hack by SEA for eight hours

AP Twitter hack causes panic on Wall Street.

Dow loses 143 pts in minutes

2013

BBC official weather and Arabic Twitter hacked posting anti-semitic and political tweets

Syrian Electronic Army hacks domain name servers of two of Twitter’s sites

New York Post’s Twitter and Facebook accounts were defaced Fox twitter hacked with

fake Obama assassination news

The false tweets were “retweeted” by thousands

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- S&P 100 constituents (Jan – June 2010)

- S&P 100 constituents (Jan – June 2010)

40% 50% 60% 70% 80% 90% 100% C u m u la ti v e D en si ty D is tr ib u ti o n ( m es sa g e v o lu m e)

Comment: The distribution of

message volume is centered around only a few companies. The Top 5 companies account for about 50%. 0% 10% 20% 30% 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 C u m u la ti v e D en si ty D is tr ib u ti o n ( m es sa g e v o lu m e) Company count

For professional media, it’s the Top 40 companies

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- S&P 100 constituents (Jan – June 2010)

- S&P 100 constituents (Jan – June 2010)

Comment: The distribution

of message volume in Twitter is different from professional media news volume, which centers

around the market opening and closing.

Sprenger, Timm: Essays on the Information Content of Microblogs and their Use as an Indicator of Real-World Events, 2011

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Distribution of event topics

Distribution of event topics

Comment: Message volume

has a serious skew towards Technical Trading events, while professional media focus more on Earnings, Insider-trading, and Analyst-Ratings.

and Analyst-Ratings.

Operations related events account for a large portion across both sources

Sprenger, Timm: Essays on the Information Content of Microblogs and their Use as an Indicator of Real-World Events, 2011

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- S&P 100 constituents (Jan – June 2010)

- S&P 100 constituents (Jan – June 2010)

Comment: 1.5% of Twitter

users account for more than 50% of total messages.

Sprenger, Timm: Essays on the Information Content of Microblogs and their Use as an Indicator of Real-World Events, 2011

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Media or Twitter?

Media or Twitter?

• Researchers from the Univ. of Edinburgh and Univ. of Glasgow show traditional newswires sources still often break news first • They find no evidence that one source

leads the other one in breaking news

• Twitter covers most of the events that are • Twitter covers most of the events that are reported by traditional newswire providers • However, most breaking news on Twitter is

tweeted by traditional newswires sources • Specialized news such as macroeconomic

indicators, analysts recommendations and estimates are not published on Twitter first – available via paid subscriptions

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Conclusions

Conclusions

• People do trade on news analytics

• It is providing value to the investment and trading process • Extracting value from unstructured text is challenging

• Extracting value from social media is even more challenging

• Event trading on Twitter is risky (authenticity/security threats etc.) • Event trading on Twitter is risky (authenticity/security threats etc.) • Trading trending topics seems to be the way to go with social media

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Ease of Integration, backtesting & deployment Historical data available

Trial available

Contact:

Armando Gonzalez President & CEO

References

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