The Fintech boom over recent years has been permanently altering the way people interact with their everyday finances. Whether it’s digital payments, financial planning, stock trading, borrowing money, or raising capital, services that were once considered novelty are quickly becoming the norm. It’s why Fintech continues to be one of the most exciting trends in the market.
The technological revolution in finance isn’t just occurring at the consumer level. It’s quickly taking over Wall Street too. The smart money has, in fact, been getting much smarter. Hedge funds and institutional traders, always in search of new alpha opportunities, are embracing innovative strategies that incorporate advanced technology in a big way. There’s no greater evidence of this shift than the growing prominence of the alternative data industry.
While fundamental and technical analysis have long been the foundation of the investment field, to develop and maintain their competitive edge, analysts and sophisticated investors increasingly crave new data sources for untapped insight. Whether it’s companies like Foursquare tracking foot traffic, Orbital Insight parsing satellite imagery, Estimize crowdsourcing estimates, or gauging social media sentiment, the game has certainly changed.
For institutional traders, speed is and will always be the ultimate edge. As John Tuld said in Margin Call, “There are three ways to make a living in this business: be first, be smarter, or cheat…It sure is a hell of lot easier to just be first.” That’s definitely been the case with trade execution, but it also rings true in regards to the speed of information. As fast as news is reported now by traditional media outlets, by the time the information hits the headlines, the market has already priced it in. The key is getting ahead of the crowd.
That’s where Dataminr has essentially cornered the market. The company leverages the power of perhaps the most effective real-time user-generated content platform in the world: Twitter (TWTR).
300 Million Boots on the Ground
Launched in 2009, Dataminr specializes in analyzing the vast Twitter landscape to identify potential breaking news and trends to create relevant alerts ahead of traditional reporting agencies and news outlets. In fact, the company partnered with CNN to develop a vertical specifically for journalists to stay on top of breaking news. The company’s business is divided into four verticals focusing on finance, corporate security, news, and the public sector. To date, the startup has raised over $175 million, backed by major investors including Credit Suisse (CS), Fidelity Investments, Goldman Sachs (GS), Institutional Venture Partners, GSV Capital (GSVC), John Mack, Vikram Pandit and even Twitter itself.
“When you think about alternative data sources, obviously there’s a tremendous interest in this field today,” said Peter Bailey, Chief Strategy Officer, Dataminr. “Professionals in the financial industry are looking for that competitive edge, looking for alternative areas like Twitter where they can find unique and differentiated information. The challenge is datasets like Twitter are massive and it’s very difficult to know where to begin to look.”
It’s estimated that Twitter users post over 500 million tweets on a daily basis. Sifting through that avalanche of data for relevancy, context and credible information to trade or invest on is, as one can imagine, a daunting task.
“With the massive influx of information today it's very helpful to have a tool like Dataminr to whittle down and help our end users really focus on what they need to know, when they need to know it,” said Steven Schwartz, President of News, Dataminr. “At a high level, our world and certainly the market in which we operate, has become increasingly competitive. Anywhere in which somebody can get a competitive edge, especially in the financial vertical, from early information matters a lot. Some people are using it for awareness and to further test their investment hypothesis. Others are trading actively based on the information they're gleaning through Dataminr, which in many instances, are many minutes ahead of other information sources. You can only imagine the benefit and advantage that is gained as a result of that.”
In trading, where competitors fight tooth and nail over literally micro-seconds to be the fastest, waiting a few minutes doesn’t just seem like an eternity; it kind of is. With over 300 million Twitter users disseminating information and first-hand accounts in real-time on any given topic at any given time, Dataminr looks to provide clients the ability to be among the first to pick up on the key signals they want.
“One of the most popular aspects of Dataminr is our coverage of conferences,” Schwartz said. “During something like the JP Morgan (JPM) Healthcare Conference where we turned out hundreds of alerts. It’s a really meaningful way to capture the conversation, and deliver the most material impactful pieces of information from a conference in real time, before research analysts and the press.”
Investment conferences often serve as fertile ground for market-moving news, typically from statements made during a prominent speaker’s presentation. In the past, only attendees were able to enjoy the pertinent bits of information. Today, the news can be widely disseminated within moments. But knowing where to look for that first-mover advantage is the tricky part.
Trading on Modern Citizen Journalism
Twitter remains one of the most effective forms of communication, particularly during times of confusion and crisis in which information is especially hard to come by. Incidentally, these kinds of exogenous shocks are also when investors and traders are most vulnerable. Dataminr says this is arguably when it’s at its best.
“Major financial events in the world can be completely unpredictable and witnessed as they occur by people on the ground around the world Tweet what they are seeing in front of them,” Bailey said. “Detecting these early eyewitness accounts first, determining the financial relevancy of the events, and delivering alerts to professionals in the finance industry is an area where we shine.”
But Dataminr isn’t just limited to breaking news. After all, trading on misinformation can be worse than trading on no information. To that end, Bailey offered up an example of how Dataminr can also be used to verify unsubstantiated claims. In 2013, when the Associated Press Twitter account was hacked, false information of a White House attack sent the markets plunging, leading to an estimated $136 billion of equity value being wiped out in only three minutes.
“When the AP Twitter account was hacked, Dataminr clients were able to dive into that situation using our product,” Bailey said. “Our users could see that the information being shared in those early moments were not eyewitness accounts, but simply retweets of the original AP tweet. If a major event like an explosion at the White House had actually happened, users of our product would have immediately seen … additional data points showing early eyewitness Tweets coming from Twitter users on the scene. Dataminr’s product provides users the ability to assess whether information is credible or not.”
Schwartz said that while the current platform does focus primarily on Twitter, the company’s core technology is “dataset agnostic and [Dataminr] will likely focus on other publicly available data sets that are out there.” He added that there will be more to come on that in the quarters and years ahead.
Becoming a Must-Have Industry
While what Dataminr does is very complex–applying machine-learning algorithms to analyze large amounts of data in real-time to deliver relevant information in context—the advantage it looks to provide is clear: Enable clients to act on what they know before anyone else.
“When Dataminr first launched commercially into the Financial Services vertical,” Bailey said, “Twitter was viewed as a more experimental dataset. That is no longer the case. A live, real-time global dataset like Twitter is now fundamentally a part of the world’s information flow, and is a must have. It’s important to note that Dataminr is easy to use and allows our clients to customize the information they receive, providing a unique experience based on the companies and financial topics important to them.
But traders know better than anyone that successful strategies in this industry have a limited shelf life. Once the market catches on, advantages eventually get arbitraged away. But for companies like Dataminr and the rest of the alternative data industry, oddly enough, that could ultimately be the goal.
When a service becomes so effective that it ultimately stops existing as a luxury and becomes an essential utility, it’s no longer about whether you gain an advantage with it, but rather how much of a disadvantage you would be at without it. For something as critical as news and information, whatever the source may be, it’s a pretty important decision to make.
“Alternative data sources are moving into the mainstream across the financial industry,” Bailey said. “It is widely understood that there is unique value in new sources of information but also a need to use new capabilities to extract the best information from new sources. Dataminr sees nothing but a very bright future given what we've been able to deliver to our users in finance.”
[Image via Anthony Quintano]
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer