Alternative sources, Dataminr, Mifid II and predicting future events by examining social media and alternative news sources.
As the January 2018 deadline for MiFID II compliance approaches, and institutional investors, hedge funds and related entities scramble to meet the requirements, there is one issue that might get easily overlooked: news and informational diversity.
Institutional investors have a responsibility to consider different perspectives which are not often reflected in the mainstream
In a world where charges of “fake news” fly about as casually as using avocado on toast, do professional investors have a fiduciary responsibility to examine all sides of issues? Ariel Capital’s Charles Bobrinskoy, for instance, forces himself to view news websites that might disagree with his perspective.
One firm close to the forthcoming sweeping MiFID II regulations thinks professionals have a responsibility to get information from a diversity of sources, not just established sources.
Best trade execution, a requirement of sweeping MiFID II regulations, also covers the information that traders receive, according to Steven Schwartz, President, Commercial Markets at Dataminr.
In today's world, it is important to have a diversity of information sources outside of traditional media. When providing traders informational diversity, Dataminr, a technology providing real-time alerts to traders, not only considers establishment sources. The firm dives deep into credible niche media and social media platforms to gain a diversity of insight that is sometimes not reflected in the consensus.
The company points to numerous examples where the consensus of news and research was looking in one direction but the news turned out very differently. This was generally the case in Brexit as well as the election of Donald Trump as US President.
Schwartz and Ed Oliver, head of finance sales, think best execution cannot be accomplished without diversification of information sources. "News and information, while not a direct input into market prices, is an obvious consideration," he said.
Dataminr Using Twitter to provide investors early indications on event outcomes
To bolster their argument, Dataminr specifically looks at Brexit. While many established news sources and bank research providers all told essentially the same story, independent research and niche news sources told both sides of the story.
CIBC, for instance, questioned the Brexit consensus more than two months before the vote took place, while Capital Economics, likewise, advised their clients to challenge what had become a loud choirs of voices warning of dire consequences. The consequences could yet materialize, but that hasn’t happened more than one year after the event occurred.
In the case of Brexit, Dataminr claims to have detected the vote outcome and communicated it to clients 55 minutes before the results were public.
In addition to monitoring both establishment and niche news sites, the firm was involved in identifying relevant alerts off social media, which provided much earlier indications that a leave vote was forthcoming. "Social media is generally unbiased," Schwartz said.
Alternative data providers are known to be actively scraping Twitter for opinions surrounding tradable events. Such appeared to be the case after Apple announced its iPhone X, as sequenced trades, often an indication of high-frequency trade activity, were visible as the stock sold off. Engaging in this process requires structuring data properly, noted Alexandra Lively of Barchart, speaking at an NIBA Conference last Thursday.
Dataminr, for its part, structures its data by coding in relevence to certain voices. THey not only consider aggregate Twitter comments but also identify thought leaders and journalists with a higher degree of importance. Their social media comments can be more frank and telling than those made in the mainstream. This was the case during the UK snap election in April 2017, when Dataminr detected credible chatter from journalists that provided clues to the potential vote result.
Likewise, during the North Korean missile launch over Japan, tweets emanating from Japan provided the clues to the event near 20 minutes before it was generally reported.
Traders who utilize alternative data cite the potential for indications to be wrong, but when it is accurate the win size can be significant.