Quantified News Based Trading - Princeton UChicago - Rajib Ranjan Borah

Quantified News based Trading:
is it the next big thing in algorithmic

trading ?
Rajib Ranjan Borah
Nov 8, 2013
Princeton UChicago Quant Trading Conference
Agenda
Background - how is news quantified
Profitability using quantitative news analysis
Machine learning techniques for designing quant news strategies

Q&A
How is news quantified Profitability
Machine learning techniques QA
Agenda

Q&A
The world runs on information and few areas as directly so as in

finance
Historical Perspective
1. Rothschild:
1. Rothschild:
A family network spread across Europe (Frankfurt, London,
Paris, Naples, Vienna)
1. Rothschild:
Paris, Naples, Vienna) enabled obtaining financial
information before peers
1. Rothschild:
Knowledge of Battle of Waterloo result one full day before
others
1. Rothschild:
others largest private fortune in the world
1. Rothschild:
2. Reuters:
1. Rothschild:
2. Reuters:
News service used pigeons & telegraph in 1850s to become
fastest news disseminator
1. Rothschild:
2. Reuters:
Continued focus on being the fastest news source
1. Rothschild:
2. Reuters:
Continued focus on being the fastest news source $12.4
billion conglomerate
How have things progressed since 1850s ?
1850s : Carrier pigeons
1860s : Telegraph
1860s : Telegraph
1960s : Teleprinter
1860s : Telegraph
1960s : Teleprinter
1980s : Electronic network (and internet)
1860s : Telegraph
1960s : Teleprinter
1980s : Electronic network (and internet)
2000s : Machine Readable News a.k.a. Quantitative News
What is Quantitative News Trading?

News is the first order factor that affects prices, volume,
volatility of stocks, currencies, commodities, etc

Computer programs that scan news articles & quantify them

-> can respond to price moving factors faster than humans

-> can monitor a vaster amount of news reports than humans

This field is known as Quantitative News Trading

During the 200 milliseconds a human is reading the latest news headline, a
trading program will have downloaded the entire article, analyzed its
meaning, & traded based on the content

Apart from trading, quantification of news is also utilized in
Media evaluation
Market research
Brand & reputation management
Political analysis

Sample output of a News Analytics feed: News
represented by numbers

Apart from trading, quantification of news is also utilized in
Media evaluation
Market research
Brand & reputation management
Political analysis



How do you quantify news reports and articles ?

Quantifying News - 1. Sentiment

News articles are assigned a score called sentiment

Sentiment says whether the article has a positive / negative or
neutral tone

neutral tone
(Sale of Apple iPhones drop = -ve sentiment)

neutral tone
Sentiment at document level is different from sentiment at
entity level

neutral tone
Sentiment at document level is different from sentiment at
entity level
(Samsung beats Apple in smart phone sales = -ve sentiment for
entity named Apple, +ve sentiment for Samsung)

How is sentiment scored ?

Naive parser: based on word count of ve / +ve keywords

Company Xs sales were good
Company Xs sales were fantastic
(Both have one positive keyword, but the intensity differs)

Discriminated parser: weighted word count
The results were good, not bad.
The results were bad, not good.
(Both score equally. Both have the same words - but mean completely
opposite)

Grammatical parser: which verbs work on which objects.
check linguistic semantics

Machine Learning: From the data and the answers, try to find
the factors

Machine Learning: From the data and the answers, try to find
the factors
Generate bag-of-words: distance of subject from these sentiment
words
Overfitting (and large vector sets), hitch-hiking and ignorance of
linguistic structure

Scoring sentiments: grammatical parsing

A database of words & phrases against which the article is
searched

searched
Which verbs act on which objects

searched
Which verbs act on which objects
Phrases which use adjectives & adverbs emphasize
sentiments, therefore greater weightage

Scoring sentiments: grammatical parsing issues

Linguistic structures like negation, double negation, sarcasm,
intensification, hanging lemma

(negation: Company X did not become the best in the world
double negation: Company X did not do bad
sarcasm: With such an attitude, X is sure to become the best firm
intensification: Company X did terribly well
hanging lemma: Company X loses lawsuit against company Y. They will
have to pay $1billion USD )

Word Sense Disambiguation - same word, different meanings

Word Sense Disambiguation - same word, different meanings

Company X received a fine
X is doing fine
X sells fine grained sand, etc
Quantifying News - 2. Relevance

Is Sentiment good enough to quantify a news report?

A news article might:
be predominantly about a company

mention that company and others as well

mention that company in passing in the article

mention that company in passing in the article
Relevance measures how relevant a news article is for a
particular company

How is relevance scored ?

How many companies are mentioned in the news article

Is the company mentioned in the headline as the
subject/object
(Headline:UBS downgrades HSBC is not relevant to UBS)

subject/object
In which sentence number is the company first mentioned

subject/object

Length of the article & how many times is the firm mentioned

subject/object

Number of sentiment words & total words in article

subject/object

Number of sentiment words & total words in article
Two firms mentioned in a news article can both have a
relevance of 1.0 (HP & Compaq announce merger)

Issues with calculating relevance

Requires synonym database:

IBM
International Business Machines
I.B.M.
Big Blue

IBM
International Business Machines
I.B.M.
Big Blue
BAML
Bank of America
Merrill Lynch
Bank of America Merrill Lynch
Merrill
BoA
Quantifying News - 3. Novelty

Often the news article is not reported in its entirety, but in
multiple spurts

multiple spurts

multiple spurts
Alert
News Article
Update
Append

multiple spurts
Alert
News Article
Update
Append
Moreover, multiple news

sources report same news

multiple spurts
Alert
News Article
Update
Append
Moreover, multiple news

sources report same news
News also cause price
changes which themselves
become news

If we do not keep track & respond to repeated instances of
the same news

the same news => we will end up repeating our actions
manifold for the same event

the same news => we will end up repeating our actions
manifold for the same event
Therefore every news article should be checked for newness
or novelty before responding

How is novelty measured ?

The keywords in the current news article are compared to
historical articles about that company for similarity of digital
fingerprints

fingerprints
A linked articles count is generated

fingerprints
Novelty is reported for
Within same news feed novelty (i.e. all Bloomberg news articles only)

fingerprints
Novelty is reported for
Within same news feed novelty (i.e. all Bloomberg news articles only)
Across all news feeds novelty (i.e. across Reuters, Dow Jones,
Bloomberg articles)
Quantifying News - 4. Market Impact

Different types of news articles have different impacts on the
price of the asset

price of the asset
Another aspect of relevance is the likely market impact of the
news article

price of the asset
Another aspect of relevance is the likely market impact of the
news article
Market Impact is therefore a function of the type of news
Quantifying News - News Types

Types of news:
Accounting news
Earnings
Trading updates (broker action, market commentary)
Guidance
Financial issues (buybacks, dividends, equity offerings, etc)
Regulatory filings

Types of news:
Accounting news
Earnings
Trading updates (broker action, market commentary)
Guidance
Financial issues (buybacks, dividends, equity offerings, etc)
Regulatory filings
Strategic news
M&A
Restructuring
Product, customer, competition related
Corporate Governance

Types of news based on time of news report
Asynchronous / unexpected
Synchronous / fixed releases
Quantifying News - Key Factors

While the following are the four key inputs:

Sentiment
Relevance
Novelty
Market Impact

Sentiment
Relevance
Novelty
Market Impact
Some news analytics based strategies use other factors as well
Quantifying News - 5. Volume

The number of news articles on the same topic can be a useful
input to validate the impact

Volume of news in Social Media also checked sometimes

Volume of news in Social Media also checked sometimes
News Analytics strategies also check market based qualitative
parameters along with news -> these help check if reaction to
news is not already factored in
Trading Volume in last 24 hours (and historical average volume)
Price change in last 24 hours

Sentiment
Relevance
Novelty
Market Impact

Volume
Quantifying News - 6. Social Media

Long term trading strategies try to gauge market sentiment from
the plethora of information in the social media front

Search engine volume counts (e.g. Google Trends) - global
search for news keywords.
Can be used to confirm market impact of news

Facebook, Twitter - user sentiment evaluated at macro level.

Facebook, Twitter - user sentiment evaluated at macro level.
Many tools use certified twitter/facebook feeds only

Sentiment
Relevance
Novelty
Market Impact

Volume
Social Media
Quantifying News Market Psyche

News Analytics tools calculate Market Psychology Indices evaluating broad psychological sentiments from global news

Country : sentiment, conflict, fear, joy, optimism, trust,
uncertainty, urgency, violence, government corruption,
government instability, social unrest, default, inflation, credit
tightening, etc

tightening, etc
Equity: Gloom, Anger, Innovation, Stress, Optimism, Earnings
Expectations, Market Risk, Market Forecast

tightening, etc
Currency: Forecast, Currency Peg Instability, Carry Trade

tightening, etc
Currency: Forecast, Currency Peg Instability, Carry Trade
Agriculture: Acreage cultivated, weather damage, subsidies,
production volume, supply vs demand, surplus vs shortage,
price up
Agenda

Q&A
Is it profitable ?
Are computers smart enough to read news and make profitable
trades?
Is it profitable ?
trades?
Is it profitable ?
trades?
News sentiments reversed

trend first -> prices
reversed trend next
Where Quantified news work

Machines are faster at responding to events than humans

Machines can process a much vaster amount of information

without any fatigue

Low latency event based trading (first to respond)

without any fatigue


without any fatigue
Analyze broad spectrum of news to formulate broad views


without any fatigue

For synchronous (fixed releases) expected events (earnings
releases/ economic figures)
Company figures provided in xml format instead of text

Economic figures provided in binary format instead of textual
news articles

Economic figures provided in binary format instead of textual
news articles
For asynchronous / unexpected news
Are quantification algorithms robust enough to calculate
trust-worthy sentiment, relevance, novelty scores ?
Opportunities : initial under-reaction

Quantified news driven trades work even when the trade is done
at the end of the day
(under-reaction to news immediately. Tetlock, et al)
Late endof day response also profitable

Trading the news immediately = very profitable
At a broad level there is underreaction to news => entering into
trades at the end of the day also makes profits
Long short strategy returns
Filtering sentiments increase profits
Increasing threshold from 90 to

95 percentile increases returns
from 55 to 138 bps in 3 days
Certain sectors more profitable
Moving from Non-Cyclicals to

Financials increased the profit
from 135BP to 147BP
Sensitivity of different sectors
Sectors like Pharma, Defense, Auto, Energy, Banking more sensitive to news
Small cap firms more profitable

Smaller Cap firms show greater response to extreme sentiment
news event
(bigger firms have greater scrutiny)
Filter & trade fewer stocks

More is not better. Quality over quantity
Trading only stocks with very high sentiment/relevance is
better
Hedged (market-neutral) is better

Long +ve sentiment stocks only
OR
Short -ve sentiment stocks only. Will fail in different regimes
Being long +ve sentiment stocks & short -ve sentiment stocks
at the same time gives consistent returns
Volatility regimes and news

Volatile vs stable Economic regimes
In more volatile markets people tend to react less strongly to

positive news and react more strongly to negative news
Surprises are more profitable

Bigger moves happen when there is news in
Stocks with low beta (i.e. surprises happen to sleepy stocks)


VIX is low (i.e. surprises during calm times)


When markets are improving (i.e. surprise to mostly long
position holders)

position holders)

position holders)
Strategy variation - sentiment changes

Instead of absolute sentiment scores, look at changes in
sentiment scores of firms
Bought stocks with highest increase in sentiment
Shorted stocks with highest decrease in sentiment
Strategy variation - bottom fishing

Bottom - fishing / turnaround stories
Buying stocks with reversal in sentiment from grossly
negative (a lot of the stocks turned out to be buybacks)
Strategy variation - trading volatility

News articles definitely lead to increased volatility, even
though direction of move might be difficult to predict
through news analytics
Take vega positions (var-swaps) using options in anticipation
of increased volatility
Generating Alpha
Soft (opinion based) vs. Hard (fact based) news
Hard news has a stronger short term reaction than soft news
Source: RavenPack, FactSet, Macquarie Research, September 2012
Generating Alpha
Scheduled/expected vs. Unscheduled/unexpected
Investors react more strongly to unscheduled/ unexpected
news than scheduled/ expected
Generating Alpha
Forecast vs Actual earnings
Investors react more strongly to forecasts than actual earnings
news
Generating Alpha
Guidance vs Actual earnings
Investors react more strongly to guidance to actual earnings
Generating Alpha
News type Event Study Results
To summarize
News Analytics works best with
Small cap stocks

Sectors like pharma, banking, etc
Stocks with low beta
When VIX is low
When markets are improving
Hard news (vis-a-vis Soft news)
Unscheduled news events (vis-a-vis scheduled news events)
Being market-neutral
Doing fewer stocks, but those with stronger signals
Quantifying News - Where it fails ?

On Sep. 7, 2008 Googles newsbots picked up an old 2002
story about United Airlines possibly filing for bankruptcy
Quantifying News - Where it fails ?

On Sep. 7, 2008 Googles newsbots picked up an old 2002
story about United Airlines possibly filing for bankruptcy
UAL stock dived immediately
Quantifying News - Where it fails?

News analytics were taught that Osama-Bin-Laden, and
killed had -ve sentiments for the markets

On May 2 2012 when news reporting Osama Bin-Landen

killed were published, news bots treated this as a negative
news article and sold stocks

On May 2 2012 when news reporting Osama Bin-Landen

killed were published, news bots treated this as a negative
news article and sold stocks
The two examples cited and their impacts show the extent to
which people have embraced news analytics to automate
trading
Quantifying News challenges

Languages like Chinese and Japanese with large number of
alphabetic symbols and complex grammar

However, there is a lot of development in this domain already

However, there is a lot of development in this domain already
The ever increasing volume of news articles from increased
news sources, and from increased volumes in social media
Agenda

Q&A
Machine Learning methodologies

Traditional approach => formulate hypothesis based on
experience/expertise, validate statistically using historical data

Machine learning approach =>

Machine learning approach => output + raw data fed into a
system. System reports factors within data that lead to output

Machine learning approach => output + raw data fed into a
system. System reports factors within data that lead to output
Three broad approaches
Tree
Forest
Planet
Machine Learning - TREE method

Output: Post-event abnormal results
Input: Quantitative news analytics


Issues: Overfitting
(works with training data
does not work on real data)

Issues: Overfitting
Solution: Pruning

Issues: Overfitting
Solution: Pruning
Machine Learning - FOREST method

Multiple factors might impact output

Instead of one tree to solve everything,
have a forest of trees


Each tree has a vote in the output.
Weightage of vote depends on accuracy
of that tree
Machine Learning - PLANET method

Instead of linear relationships between input and output,
Planet breaks the variable space into sections, fits linear
functions within those sections
Machine Learning - PLANET method

Instead of linear relationships between input and output,
Planet breaks the variable space into sections, fits linear
functions within those sections
Agenda

Q&A
Contacts
For 4-month Executive Program in Algorithmic Trading:
contact@quantinsti.com
E-PAT: 4 month weekend online program (3hrs every Sat + Sun)
Statistics
Quant Strategies
Technology (coding on algorithmic trading platform)
For algorithmic trading advisory: contact@iragecapital.com
To reach me directly: rajib.borah@iragecapital.com
Text Mining: An example

Converting a line
of news into
metadata to be
used for analysis
or trade
Calculating Novelty
Novelty: It indicates Novelty by comparing current
news with cache of previous news
Paul C. Tetlock defined Staleness measure as follows
Define the unique single word and two-word set for ith stock as
for past 10 news staleness:

Quantified News Based Trading - Princeton UChicago - Rajib Ranjan Borah

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Quantified News based Trading:

is it the next big thing in algorithmic

Machine learning techniques for designing quant news strategies

How is news quantified Profitability

Machine learning techniques QA

Machine learning techniques for designing quant news strategies

How is news quantified Profitability

Machine learning techniques QA

The world runs on information and few areas as directly so as in

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

How is news quantified Profitability

Machine learning techniques QA

What is Quantitative News Trading?

How is news quantified Profitability

Machine learning techniques QA

What is Quantitative News Trading?

How is news quantified Profitability

Machine learning techniques QA

What is Quantitative News Trading?

How is news quantified Profitability

Machine learning techniques QA

What is Quantitative News Trading?

How is news quantified Profitability

Machine learning techniques QA

What is Quantitative News Trading?

How is news quantified Profitability

Machine learning techniques QA

What is Quantitative News Trading?

How is news quantified Profitability

Machine learning techniques QA

What is Quantitative News Trading?

How is news quantified Profitability

Machine learning techniques QA

What is Quantitative News Trading?

How is news quantified Profitability