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Alt Data: A Work in Progress
Traders Magazine Online News, December 18, 2018
Banks and investment firms have increased their consumption of alternative data sets, but there are still challenges around selecting the most relevant data for trading purposes, according to panelists at a recent industry fintech conference.
In particular, the quality of time stamping and backtesting from third-party alternative data platforms is not always up to the standards of traders and investors, according to panelists at Tabb Group’s FinTech Festival conference in November.
To navigate the space, sell-side firms have hired big data experts to work with their fundamental research analysts who lack the skills to analyze alternative data.
“The success comes from knowing where the data is, knowing what it means and knowing how to process it,” said a big data expert with a global bank on the panel “The Automated Analyst: Leveraging Alt-Data to Trade.” The expert in predictive analytics said his role is to find alternative data that is sensitive to companies covered by analysts and to help them understand how alt data works.
For instance, when the bank’s forestry and paper analyst learned that a factory was under construction by one his covered companies, the data expert obtained access to satellite photos of the roof of the building which provided visibility from the roof to the ground. Armed with this data, the analyst was able to determine that the factory was partially constructed.
“While this was not deep quantitative analysis, the data was meaningful to someone who understands it,” said the bank’s big data expert.
Banks and brokers are also trying to augment the traditional analyst’s product to create data solutions for institutional clients, and this includes helping fundamental investment managers to analyze data mining.
In one case, a large bank developed an artificial intelligence service that processes an enormous amount of unstructured data (mainly news, Twitter and sentiment analysis) to surface and rank connections between breaking news and investors’ portfolio holdings.
But even in this instance finding the most relevant alternative data is still a challenge.
Surveillance
Data surveillance is part of the process. A data expert with a global bank said it collaborates with its innovation lab which visits Silicon Valley to scout for new alt data companies.
Although there are hundreds of alternative data sources available, the panelists differentiated between primary research versus secondary sources of data.
For instance, instead of relying on vendor aggregated feeds, the global bank creates its own data by surveying companies on the list it received from the bank’s innovation lab. “The integration of different skill sets is what generates exploitable results,” said the speaker.
Rather than blindly diving into data mining, it’s important to have an economic basis for why they are searching the data. “I have an agenda for what I want to predict,” said the big data expert.
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