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Unlocking Trading Opportunities Through Alternative Data

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In the highly competitive financial services landscape, every broker is attempting to attract traders with cutting-edge technology. How do you gain an edge? Offering market analysis to help traders with early identification of trading opportunities is one option. But this too is being increasingly offered by brokerages worldwide.

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By Acuity Trading | June 16, 2022

This is where alternative data sources come to the rescue. They give traders, both professional and retail, deeper insights into the markets and identify viable trading opportunities before others find them through the traditional data sources. And it isn’t difficult to gain an information advantage through alternative data, given that the amount of data generated globally is predicted to grow 10x by 2025 to 163 ZB annually.

 

What Constitutes Alternative Data?

Alternative data is any data derived from non-financial or non-traditional sources to gain a market edge. It includes digital sources of data, such as mobile app use, financial transactions, newsfeeds, online communities, geospatial information, metadata from communications, satellite data, and more. It also includes non-digital sources of information.

Using alternative data to gain market insights can offer multiple benefits, including timing advantage and effective risk management. No data is too obscure if it can help brokers drive alpha. Advances in technology, such as Artificial Intelligence and Machine Learning, allow us to extract valuable information from multiple sources on the internet, including social media chatter, speeches, blog posts, presentations and press releases. Technology then helps convert huge amounts of alternative data into quantifiable metrics for easy analysis.

Alternative data has been found to be so effective that the global market size for alternative data was estimated at $2.7 billion in 2021. The market is expected to grow at a CAGR of 54.4% from 2022 to 2030 in the US alone. One of the primary drivers of this growth is the significant rise in alternative data sources over the past decade. Today, sensor and IoT-enabled devices are also offering useful information.

 

 

Source: Grand View Research

How Alternative Data Helps Brokers

Today, any information that can influence market behaviour or stock price is instantly shared with market participants globally and analysed by analysts and investors. Needless to say, timely access to information that provides a competitive edge, whether it is to gain an edge over peers or against benchmarks, is much in-demand.

Traditionally, this information has been limited to economic releases by various nations, company reports and financial statements, and central bank announcements. The data is released on a monthly, quarterly or annual basis and tends to have the characteristic of a lagging indicator.

On the other hand, alternative data offers an almost real-time view of economic activity, consumer sentiment and much more, beyond the scope of the officially reported data mentioned above.

While there are multiple use cases for such data for market participants, brokers, in particular, can attract and retain clients by using this data for:

 

Tracking Inflation and Its Market Impact

Millions of products can be tracked online via web scraping to analyse inflation levels. Inflation not only influences asset prices but also central bank monetary policies. It also impacts forex rates. Therefore, the ability to track inflation can offer traders a crucial decision-making tool for entry and exit positions, as well as risk management.

Stock Market Forecasts

Key company data can be culled from alternative information sources, such as foot traffic at its stores, inventory numbers, supplier payments track record, discussions forums and social media chatter. This can offer insights beyond the usual earnings call transcripts and analyst predictions. It could even help identify the current and predict the future financial health of a company.

Commodity Market Forecasts

Satellites are already being used to track the movement of cargo across the oceans, road and rail. Tracking the shipping of crude oil, natural gas, iron order, gold, coffee, wheat, corn, and more can help identify supply disruptions, apart from gaps in demand and supply. This could help predict future commodity prices and market sentiment and behaviour.

ESG Investment Decisions

Forums, blogs, social media and regular news are effective sources to track how companies are fulfilling their ESG responsibilities. AI can help discover events and initiatives by companies associated with social and environmental responsibilities, such as awareness drives, level of diversity in the managment team, etc. Machine learning can also be used to scour the World Wide Web for ESG terminology to keep track of companies fulfilling their responsibilities. ML can also help identify investor sentiment regarding these companies to support trading decisions.

Risk Management

Brokers can offer traders means to enhance their fundamental analysis through alternative data, including analysis of changing market sentiment and behaviour, high-frequency news flows and large quantities of economic data. This can then be used for forex and stock market predictions and fine tuning of strategies to mitigate potential risks.

How Technology is Facilitating Alternative Data Analysis

AI and ML are helping brokers turn infobesity into an advantage for their clients. These technologies help uncover, aggregate and analyse alternative data sources globally and turn them into easy-to-understand visual formats, at scale and in real-time. This empowers traders to spot even the most subtle trends effortlessly, and identify patterns and correlations to fine-tune trading decisions.

By leveraging the power of big data, brokers can offer multi-asset data analysis, culled from disparate data sources and sets to augment insights derived from technical and fundamental analysis. For example, machine learning can be used to extract investor optimism from news items, both text and images. This can then be represented in an easy-to-understand visual format. Given that market reversals often occur following bullish or bearish, traders can prepare for trend reversal when they see market optimism reaching a high level.

Similarly, information on innovations by a company can be gleaned from the number of new patents it has filed for. Technological innovation can be a driver of stock performance. So, even before the market digests the announcement of an innovative product/service launch, traders with access to alternative data analysis can prepare for market moves.

Fintech firms and brokers are already waking up to the competitive edge offered by alternative data. Offering this type of data analysis is eased via cloud-based solutions, where partnering with a single provider can offer access to best-in-class fundamental data analysis to identify shifts in the markets across multiple assets. For this Acuity uses cutting-edge NLP technology to uncover valuable insights from global news content. Unstructured data is transformed into actionable trading tools that can be used by investors of all skill and experience levels. Contact us to learn more.

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