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Wall Street robots struggle with the confusing world of Reddit

(Bloomberg) – Rocket emojis for stock earnings. “Tendies” as lingo for profits. GIF with company tickers. The Reddit WallStreetBets forum is difficult for humans to follow at best. But think about the machines: After the retail stock frenzy last month caused unprecedented chaos, hedge funds that track the platform with algorithms have a renewed sense of purpose in their mission to uncover the next market craze. , but it is proving enormous pain. It is not easy to train computers to extract amateur talk on message boards into data that is fit for real world trading. Even for the basic task of identifying values, an algorithm has to learn to match language of millennials, memes and typos. with the intended theme. And that is just the beginning. Ask the folks behind Reddit bots like Stefan Nann. “You can’t just apply the standard English word library,” said the CEO of Stockpulse, a social media analytics firm in Germany. “We were reading these comments and deciding if this comment is positive or negative; this is how we train the machine.” The sentiment analysis on WSB is the latest in the world of alternative data, which is forecast to grow from last year. $ 1.64 billion to $ 17.35 billion in vendor revenue by 2027. NN Investment Partners and PanAgora Asset Management are among the systematic investors looking for trading signals on social media, while more brokerages are offering investors customer tools to do just that, for good reason in theory. A herd-tracking strategy would have paid off big, in hindsight. According to Stockpulse, an indicator measuring the GameStop buzz on Reddit peaked in early December, a solid month before its price started to climb. A strategy of simply buying the five most discussed companies on WSB the previous week could have returned 61% in 2020, a backtest from data provider Quiver Quantitative showed. This is roughly how it works. One Reddit user is getting lyrical about why BlackBerry Ltd. is worth more than four times its share price. Then an algorithm trained by a provider like MarketPsych records the ticker and sweeps the post for signs of trading sentiment. Try to find out the intensity of bullish calls from signals like “market leader”, emojis, future tense usage, even expletives. Then the process is repeated through bands of values. “Some call us because they’re trying to take advantage of the herd,” said Richard Peterson, a board-certified psychiatrist who founded MarketPsych. “Some are just trying to find ways to protect themselves.” But for the form of artificial intelligence known as natural language processing, message boards aren’t as straightforward as, say, figuring out the signals of a corporate executive on an earnings call. If new jargon emerges, humans must update the machines dictionary. Doing this around the world is even more difficult. It took the MarketPsych team some time to figure out what different emojis mean in different cultures, or that British merchants criticizing an action could use more subtle insults. In an example cited by StockPulse, the computer has to learn the difference between “hold” as a verb versus an exchange-traded fund with a ticker that contains the same characters. These efforts are in high demand. “At some point it starts to look like a single hedge fund because they all behave the same way at the same time,” said Francesco Filia, chief executive of hedge fund Fasanara Capital, which began monitoring Reddit internally last month. “You have to be aware.” Thinknum and Social Market Analytics are among the growing number of sentiment data providers that have recently launched products that feature the talk of stocks on Reddit in one form or another. Bloomberg LP, the parent company of Bloomberg News, provides access to alternate data sources in the terminal and through Bloomberg’s data license, and people now account for roughly a quarter of US equity trading volume. , Knowing where retail cashheads should theoretically test. lucrative. Such insights would help the crowd determine where the next bombs on the market would land. In January, the retail army inflicted a squeeze on the recording industry when they huddled on some of the most hated names to hurt short sellers, or “shorties” in Reddit’s vernacular. At NN Investment Partners, data scientist Melissa Lin says her sentiment following signals in the news and on social media has performed better than simply chasing price momentum, but particular forums like Reddit don’t have a track record. Long enough of action selection for data processing that quants like Lin do. And anecdotal evidence aside, retail investors don’t have a strong and consistent track record, he says. “It’s not a simple linear relationship between sentiment and stock returns,” Lin said. “Much more research is needed to filter out the noise and make it really useful.” Read more: Quants sounds an alarm as everyone chases the same alternative data Emmanuel Hauptmann says his quantification team at RAM Active Investments has recently started monitoring the stock chatter on Twitter – which he considers highly correlated with Reddit, but his expectations are low . “At the moment, we see it as a pure reduction in tail risk,” the fund manager said. “We don’t use it as an alpha signal.” Still, even with all the data in the world to track the ebbs and flows of retail sentiment, market timing is everything. “Once people are in his face – saying ‘I love this, death to shorts!’ – that’s too late, “Peterson said on MarketPsych. (Adds promotion on alternative data story) For more articles like this, visit us at bloomberg.com Subscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP

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