But for the form of artificial intelligence known as natural-language processing, message boards aren’t as straightforward as, say, figuring out signals from a corporate executive on an earnings call.
If a new slang emerges, the dictionary for the machines needs to be updated by the humans. Doing this worldwide is even harder. It took some time for MarketPsych’s team to figure out what different emojis mean in different cultures, or that British traders talking down a stock might use more subtle insults.
In one example cited by StockPulse, the computer has to learn the difference between “hold” as a verb versus an exchange-traded fund with a ticker containing the same characters.
These efforts are in big demand.
“At some point it starts to resemble a single hedge fund because they all behave at the same time in the same way,” said Francesco Filia, CEO of hedge fund Fasanara Capital, which started monitoring Reddit internally last month. “You need to be on top of it.”
Thinknum and Social Market Analytics are among the growing number of sentiment data providers who’ve recently rolled out products tallying up the stock chatter on Reddit in one form or the other. Bloomberg LP, the parent of Bloomberg News, provides access to alternative data sources on the terminal and via the Bloomberg Data License.
With individuals now accounting for about a quarter of U.S. equity trading volume, knowing where the retail cash heads next should in theory prove lucrative. Such insights would help the long-short crowd figure where the next market bombs land. The retail army in January famously inflicted a record industry squeeze as they crowded into some of the most hated names to hurt short sellers, or “shorties” in Reddit vernacular.
At NN Investment Partners, data scientist Melissa Lin says its signal tracking sentiment in news and social media has been performing better than simply chasing price momentum.
But particular forums like Reddit don’t have a sufficiently long history of stock-picking for the data crunching that quants like Lin do. And anecdotal evidence aside, retail investors don’t have a consistently strong track record, she says.
“It’s not a simple linear relationship between sentiment and stock returns,” Lin said. “You need a lot more research to filter out the noise to actually make it useful.”
Emmanuel Hauptmann says his quant team at RAM Active Investments has recently started monitoring stock babble on Twitter—which it sees as highly correlated with Reddit—but his expectations are low.
“For the moment we see it as a purely tail risk reduction,” 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 all-out in your face—saying ‘I love this, death to the shorts!’—that’s too late,” said Peterson at MarketPsych.
—With assistance from Chris Miller.
This article was provided by Bloomberg News.