On May 16, Engadget, a blog on consumer electronics, posted breaking news that Apple’s iPhone and Leopard OS were going to be delayed. This was based upon an internal Apple email that they had been able to lay their hands on.Within a few minutes, AAPL had lost 3% off its market cap. Techcrunch has a blow by blow account here. Paul Kedrosky has another interesting take on the episode here.
My interest in this episode is in connecting it with other recent developments in text analysis based algorithmic trading to see what this might augur for the future.
Algorithmic trading has been around for a while. From its early days when computers would look at arbitrage opportunities (between say an index and its underlying stocks) algorithmic trading has become very, very sophisticated on the quant side of things. Recently, the interest has now been shifting to text analysis of breaking news and opinion on the internet.
Reuters recently announced a product called Reuters NewsScope which analyzes news items as they are breaking and assigns them sentiment scores (good news/bad news). These sentiment scores and the associated tickers can then be fed into a computer which based upon pre-programmed rules can straightaway place trades. All this happens in milliseconds, well before human readers can read and act upon the news.
So what happens when a news flash like the one Engadget broke hits the blogosphere in a market full of “algos”? Within milliseconds (not six minutes) the stock will drop as the computers place their trades. This particular news was bad, but not life-threatening for Apple. But in other cases – say a pharma company’s blockbuster drug candidate fails the clinical trial – it will go all the way down, in pretty much the same time frame – milliseconds. If the news is false and planted, as it was in Apple’s case, seconds later, the bad guys are a good bit richer than they were.
This puts enormous responsibility on the shoulders of both established media as well as bloggers to verify authenticity of breaking news. The problem with this is that breaking news doesn’t stay “breaking” if somebody else breaks it first.
A very interesting conflict of interest here is that in a world where bloggers get paid on advertising which is directly proportional to eyeballs (unlike subscription based newspapers), the incentives are stacked in favour of “post first and verify later”. Unless, of course, they care for something called “reputation”.
Another interesting aspect is the importance market seems to associate with iPhone. Is iPhone a make or break for Apple? I don’t think so – but the hype Apple generated so early in the game might work against them if it is not met (or exceeded) on time. Your thoughts?
Giri, I do agree with most commentators that the iPhone is very important for Apple in the short term. It is a major new product (category) like the iPod with signficant new revenue and profit opportunities.
Technology doesn’t understand the human mind. It can record events, dig information, or compute, but it cannot see thru the human tricks. Analytics will always remain one step short. And that is the gap of nature.
I would imagine that feeds going into trading algorithms will have to cross a high bar, that most bloggers won’t cross. Its still the ‘wild west’ days of blogging, so you can expect some chaos. But as more big money comes to depend on it, money managers will turn to info suppliers that cross a certain bar eg. like the Reuters service you mentioned. Would be nice to see you guys at Gridstone as well become a standard feed into one of those algorithms 🙂
I totally disagree.
“This puts enormous responsibility on the shoulders of both established media as well as bloggers to verify authenticity of breaking news. The problem with this is that breaking news doesn’t stay “breaking” if somebody else breaks it first.”
Well, you dont have to, and thats the whole point. Thats precisely what Guy is betting on with the truemors thing.
See this is how you look at it. Blogs and therefore such reports are a fact of life, we shd learn to live with it.
It happens all the time while running a news story as it is not always possible to verify the veracity of the news source. It’s for the investor to be wary of the pitfalls before selling his stock on the basis of a breaking news. As for Algos, I agree with Mohit since there sure are built in safeguards to prevent a piece of news becoming an execution trigger.
There are regulations to prevent one from profitting by spreading rumor. SEC / NASD (I’m not sure whose authority it comes under) has successfully prosecuted folks who have spread rumors by fax / phone / internet message boards. Blogs are no different than messageboards.