How a FinTech Company is Using Machine Learning to Find Undervalued Stocks

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The financial industry has long been viewed as one slow to embrace change. After all, big banks responsible for handling billions of dollars of clients’ money have a vested interest in promoting confidence in the tried-and-true methods they’ve utilized for decades. However, just like it has for so many other industries, technology has brought change to the finance industry’s doorstep. Robo-advisors and online trading have fundamentally changed the way we invest...and left many of the old tools much less effective than they used to be.

That’s why the team at Trade Ideas is dedicated to remaining at the cusp of changes in technology. Founded in 2002, Trade Ideas LLC seeks to provide investors, traders and market professionals with the most efficient and effective algorithms and models that predict market outcomes. The team at Trade Ideas is convinced that the sheer amount of data out there is far too great for any one investor to analyze and act on adequately, so they’ve invested in cutting-edge machine learning technology that can analyze market data with a degree of precision far greater than any person could muster on their own.

Recently, Equities.com Broadcast Contributor Silvia Davi had the chance to sit down and speak with Co-Founder and Managing Partner of Trade Ideas David Aferiat about the innovative A.I. technology used at Trade Ideas and how the company just might represent the next major step forward for the finance industry.

Aferiat explains that his team uses machine learning “in order to create algorithms that have the highest probability for that day in the markets.”

“The stock market is like a vast ocean. You can find activities that meet criteria at various different depths of the stock market,” says Aferiat. “There’s always a rally going on, and there’s always momentum price patterns to be looking for. What we do at Trade Ideas is, we find specific universes that would otherwise go unmentioned.”


So what type of stocks does Trade Ideas cover? Aferiat notes that they don’t discriminate - they’ll look at high profile stocks like Netflix (NFLX) or Facebook (FB), as well as smaller and less highly regarded stocks. “We look at everything. We will find opportunities in such stocks that we call ‘low floaters,’ that happen to have a low float, with a lot of kinetic energy. And when price movement occurs, they often have outsized movement related to them, and we spot them all the time.”

The Trade Ideas team is able to spot these movements thanks to their machine learning system they call “Holly” (A play off the idea that it’s ‘The Holy Grail’ of investing analysis). While the models they use are very complex Aferiat says that in essence, “we take the day’s tape of information, add it to our historical database, and derive new data points from that. Holly then creates what’s called a ‘quantitative combine’.


“Holly then takes that information, measures the performance of the base strategies, optimizes them, and reduces it down to a few algorithms. Trade Ideas can then publish this trade regime of ideas to their customers.”

A Supplement to Today’s Trading Tech

So is this model an existential threat to robo-advisers? Not according to Aferiat.

“Robo-advisement is all about taking ideas at the portfolio level and managing it to an index. We all know you’re not going to generate wealth tying it to an index,” says Aferiat. “So, what we do is look at ways to capture additional alpha. And for robo-advisement firms, and registered investment advisors looking to for that additional alpha, we apply our technology and capture alpha so you can do better than the index.”

“The reason why this data is so important and why we’re growing at such a clip is because we fit a need in the market today, where people feel they don’t have access to the best information,” muses Aferiat. “It’s very hard to be using Bollinger Bands and other indicators that were created 40 years ago, and be trying to apply them individually to the market. Trend-wise, it’s the larger trend of robo-advisement that we think we’re shaping together, and the ability to bring this technology to the forefront for every market participant to use.”


A GPS for Traders

Moving forward, Aferiat is insistent that the goal at Trade Ideas should be to “help people understand a fully-formed idea in the stock market that has a plan for seizing that opportunity.” According to him, “when you understand a plan that’s been tested, optimized...you understand when to follow that plan. And when you decide not to follow it, but to perhaps stay in the trade longer, you understand when you’re off that plan. You understand what the parameters are.”

In other words, “It’s just like a GPS for traders.”

David Aferiat will be a speaker at Equities.com's Emerging Growth and Innovation Forum, Wednesday, August 10th. Sign up for the conference here.

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

Companies

Symbol Name Price Change % Volume
FB Facebook Inc. 145.28 -2.29 -1.55 6,907,260 Trade
NFLX Netflix Inc. 323.50 -1.66 -0.51 4,740,763 Trade

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