Rocket emojis for stock gains. “Tendies” as slang for profits. GIFs with company tickers.
Reddit forum WallStreetBets is hard for humans to follow at the best of times. But spare a thought for the machines.
After the retail stock frenzy last month caused unprecedented havoc, hedge funds trawling the platform with algorithms have a renewed sense of purpose in their mission to figure out the next market craze.
Yet it’s proving a massive pain. It’s not easy training computers to extract the amateur chatter on message boards into data that’s anywhere fit for trading in the real world.
Even for the very basic task of identifying securities, an algo has to learn how to match millennial-speak, memes and typos with the intended subject. And that’s only the start of it.
Just ask the people behind the Reddit robots like Stefan Nann.
“You cannot just apply the standard English library of words,” said the chief executive officer of Stockpulse, a social-media analytics firm in Germany. “We were reading through these comments and deciding ourselves if this comment is positive or negative—that’s how we train the machine.”
Sentiment analysis on WSB is the latest thing in the world of alternative data, which is projected to grow from last year’s $1.64 billion to $17.35 billion in vendor revenue by 2027. NN Investment Partners and PanAgora Asset Management are among systematic investors who scrape social media for trading signals, while more brokerages are offering clients tools to do just that.
For good reason in theory. A strategy of following the herd would have yielded big profits, in retrospect.
According to Stockpulse, an indicator measuring GameStop’s buzz on Reddit first peaked in early December, a solid month before its price started climbing. A strategy of simply buying the five companies most discussed on WSB in the previous week could have returned 61% in 2020, a backtest by data provider Quiver Quantitative showed.
This is roughly how it works. A Reddit user is waxing lyrical on why BlackBerry Ltd. is worth more than four times its stock price. An algo trained by a vendor like MarketPsych then records the ticker and sweeps the post for trading sentiment signals.
It tries to figure out the intensity of bullish calls from cues like “market leader,” emojis, the use of future tense, even expletives. Then the process gets repeated across swaths of securities.
“Some are calling 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.”