What began as technology used by high-frequency traders to quickly access core economic data –such as consumer price indexes and unemployment numbers – has become an increasingly sophisticated data-delivery system attracting attention of market players outside the world of HFTs.
Machine-readable newsfeeds are services that take data from newswires and feed it directly to computers. The computers can then act on that information automatically, placing trades at lightning-quick speeds.
Now, however, machine-readable newsfeeds offered by such companies as Thomson Reuters, Bloomberg and Dow Jones, are drawing in a new breed of customers, like long-term investors, as well as firms trading futures and options.
"When we launched it early on, it was a niche product adopted by the most sophisticated investors," said Rich Brown, global business manager for machine-readable news at Thomson Reuters. "Over the last few years, we’ve seen a broader adoption, beyond the higher-frequency black-box traders to longer-term investment strategies."
Brown said the service offered by Thomson Reuters can determine signals for changes in stock prices that can last for months, not just milliseconds. While high-frequency traders still use the service to give their computers an edge, the system is also used by traders less sensitive to latency, such as those engaged in statistical arbitrage.
Brown said that though his company’s platform launched in 2006, its growth has exploded since the service began offering less structured news data.
Research firm Aite Group reports that about 35 percent of all quant firms are now using some sort of machine-readable news.
"The first time I did a report on it, only 2 percent were using it," said Adam Honoré, research director for Aite. "That was 2008, so there’s been pretty substantial growth."
In particular, many quant funds trading futures and options are gravitating toward machine-readable newsfeeds, he said.
It is still primarily high-frequency traders who want quick access to economic indicators, but more traditional firms are using electronic news feeds for risk management and other purposes.
Harrell Smith, head of product strategy for the systems vendor Portware, said there is only so much information traders can take in at once. Computers can notify traders if there is a event or trend they should examine, he said. Firms that use the technology, however, tend to be very quiet about their methods.
"Like a lot of other emerging technologies, it’s something that a lot of firms may not want to widely publicize," Smith said. "Especially in the hedge fund community – they’re notoriously secretive when it comes to anything that could give them an edge over their competitors."
Measuring Sentiment
Firms using analytic systems for news feeds can even measure the sentiment of an article, if news is positive or negative. While some vendors provide such systems, the more advanced users are coming up with their own sentiment scores, said Brian Rooney, core product manager for news, research, message and mobile applications for Bloomberg Professional Service.
"If you can take the story and analyze it in your own way, you’ve got the opportunity, at least, for your own edge," Rooney said.
BN Direct uses Bloomberg-generated content and news from press releases and public filings. For an extra fee, users can add content from other sources as well.
The service can analyze how many stories are being written about a company, as well as how many on-line readers a story receives. A spike in either one can be an indication a stock is on the move.
However, it can be challenging to decide what that spike really means. There’s a big difference between a story about quantifiable market data and a story about a company whose chief executive officer resigned, which could be good or bad news.
"News is one of those final frontiers people are still in the early stages of figuring out how they’re going to handle," Rooney said.
Slowing Down Fast
As technology develops, the percentage of machine-readable news feed users with high-frequency trading strategies continues to decline. Traditional firms might even want to use news feeds to slow their trading down, Aite’s Honoré said.
For instance, if an investor is planning on buying stock in a company which then announces good news, a computer picking up on that information might delay trades until after the stock comes down off its spike. Honoré noted that such a strategy runs contrary to the whole idea of high-frequency trading, yet it is one way firms are now using machine-readable news.
Steve Hughes, director of sales at the HFT service provider Exegy, said the high-frequency traders he deals with are not too interested in machine-readable news feeds.
"When you can process information in 10 millionths of a second and get to the market with it, you know when news came out and a stock starts to react without even needing to know what the news is," Hughes said.
According to Hughes, machine-readable news feeds might be more helpful to asset managers on the buyside trying to execute longer-term strategies at the best price.
In fact, these services have been gaining a following among traditional asset managers, said Rob Passarella, vice president of financial markets for Dow Jones.
Managers frequently use multifactor models that weigh various company fundamentals. Now some models use news as one of the factors they consider in examining a stock, Passarella said.
Since investment banks have cut back their research desks, news has become a bit of a proxy for the feedback that used to come from researchers. Where industry experts used to move stocks, now that role is frequently taken on by journalists.
"I come out of the equity research world, and you know what’s happened to research in the last couple of years," Passarella said. "A lot of times what happens is that globally there aren’t enough people covering from a research perspective, and news in a sense fills in the gap for coverage."
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