Information explosions are making the data-reliant stock markets more predictable, even for armchair investors.
By Jack Peat
Twitter and Facebook create data, Google reads data and big money is made on global stock markets predicated on the rise and fall of data. What was once the preserve of affluent traders with insider knowledge is now in the hands of armchair investors, as valuable insights into the world of global trading become openly available, democratising the FTSE and liberating Nasdaq.
The online data explosion (big data) has been used in many varied and wonderful ways by the business community, becoming synonymous with insight and helping to open up previously closed markets to companies and investors. Retailers are now marketing to consumer preferences, seasonal changes and even days of the week rather than relying on the law of large numbers and ‘chance marketing’ on billboards and TV ads. Algorithms that define people are commonplace on the web, and our personal browsers are now virtual projections of ourselves.
From a financial perspective, the funding landscape has become massively democratised. Crowdfunding, for example, has created a nation of venture capitalists and angel investors by simply providing a holistic platform (essentially a WWW. for investors), and Morgan Stanley and other investment brokers are pushing ISA savers to consider funds in search of better returns.
But one of the latest moves has come about quite under the radar. Stock markets (financial cliques for suited chiques), are becoming easier to read thanks to the open supply of data on the web. Google, Facebook, Twitter and others are giving more insight into how traders move and thus provide vital information on the how the value of stocks are likely to perform.
Ask yourself this: What would you do if the stock markets were as predictable as the weather? Of course, commodity traders already do read the stock markets by using meteorologist to predict the weather and anticipate the price of natural gas, which fluctuates depending on seasons and temperatures. But this has never been a democratised tool.
A new study from an international team of researchers has found a way to predict the stock markets based on the changes in the frequency of 98 terms – such as ‘revenue’, ‘unemployment’, ‘credit’ and ‘nasdaq’ – in Google searches. They found that changes in Google query volume for search terms related to finance reveals patterns that could be interpreted as early warning signs of stock market moves, and could create a substantial profit.
Their paper, entitled Quantifying Trading Behavior in Financial Markets, demonstrated that trading on the basis of the number of queries on Google using the keyword ‘debt’ could have brought in returns of up to 326 per cent. This supports the idea that drops in the financial market may be preceded by periods of investor concern, and drops in interest in financial topics could be used as a signal for subsequent stock market rises.
But if prices are predicated on confidence, why not go to the social hotbed of opinions that is Twitter and Facebook? That was the thoughts of a British company that is launching the world’s first social media-influenced trading platform, which reads sentiment collected online to predict the move of stocks.
Their spread betting platform includes a feed detailing social media sentiment, which analyses data from Twitter, Facebook and other channels to give 250 stocks and major foreign exchange pairs a positivity rating of one to 100. The system is based on findings from US researchers, who claimed that Twitter sentiment had an 87.6 per cent chance of predicting whether the Dow Jones index would fall or rise on any particular day.
Whatever the platform, the ability of the internet to democratise financial capabilities is something we should all be aware of. Banks are still the go-to place for our cash reserves, but as they withdraw from the funding landscape a period of low interest returns should be expected.
For those of us (lucky enough) to have cash stored in ISAs or stocked away in a current accounts, a one per cent return could soon be turned into double digit profits if the vast array of new investment platforms are considered. These new funding methods are making money move, reverting back to the virtuous finance mechanisms of old. What’s more, from the investors perspective, this is increasingly doable, and all from the comfort of your own armchair.