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Alternative data – where does it come from?


 

Market Update

Alternative data – where does it come from?

Traders are always looking for an edge when it comes to making a profit. Some will swear by technical analysis, which involves the study of charts and the application of specific combinations of indicators and drawing tools. But others insist that trading success comes from fundamental analysis. This would include such factors as comments from central bankers, changes in bond yields, the inflation outlook, and the political landscape. Where an individual stock is concerned, it would include studying the company accounts, comparing these with other corporations in the same sector, being fully informed about news concerning the business and its executives, as well as anything more broadly that could affect trading conditions. But in a world where investors measure their performance by creating alpha, that is, outperforming the standard stock indices, many now look to alternative data to give them an edge.

What is it?

Alternative data can be anything that is beyond the standard measures already available to investors. It can provide a more nuanced insight into company performance than traditional data sources. In their early days, hedge funds would seek to get an advantage over the competition by employing unusual methods to collect such information. For instance, they would post staff members inside a shopping mall to count how many customers would leave a particular store with a purchase. In the first ‘Wall Street’ film, Bud Fox, as played by Charlie Sheen, surreptitiously followed Gordon Gekko’s business rival, Sir Larry Wildman, to establish a corporate takeover target. But over the past decade alternative data collection has become far more sophisticated, and complex, due to the growth in computing power. This has led to the proliferation of fresh available data which has been helped along by the increased take-up of the smartphone over the last ten years. All the apps on your phone are a rich source of data. In fact, with so much data being collected, the trick is sorting out the wheat from the chaff, to analyse what is important while dumping the rest.

Where does it come from?

Alternative data comes from a variety of sources, such as tech companies, academic research and that collected by online brokers themselves. Popular alternative data sets include anything to do with consumer spending. This can be scraped from apps, social media, websites, and online surveys. The cheapest data is collected and sold on in a raw form. But it can also be analysed by bespoke research outfits and delivered in a more distilled format. This data can come from places as diverse as gaming sites and food delivery companies. Corporate data would include spending on credit and debit cards where good sources would be car sales, online commerce, airline, and travel bookings. Or even online brokers. Just consider the Robinhood trading app. While billed as a ‘commission free’ brokerage, Robinhood bundles up its customers’ trades and sells them on to its prime broker. This ‘payment for order flow’ gives the prime broker advance notice of what Robinhood’s retail customer base is buying and selling. It may not be ‘alternative’ by a purist’s definition, but it is very useful data indeed.

Image shows piles of coins of various heights sitting on a grey floor of hexagons. On the left a hand appears to place a coin on one of the piles

Harnessing the power of social media

Social media is an incredibly valuable type of alternative data. Consider how often stories and topics circulate on social channels well before they are picked up by traditional mainstream news outlets. Consider also how often we now hear from influential sources on social media. Before he was banned, former US president Donald Trump was never off Twitter. This meant that we found out what the US president was thinking from Twitter first, rather than waiting for official policy announcements or a presidential press briefing. Trump may have gone, but Elon Musk, the head of Tesla, hasn’t. Elon isn’t as prolific as Mr Trump used to be, but his tweets are often market-moving, thanks to his lack of discretion and complete disregard of the Securities and Exchange Commission (SEC). This is one of the beauties of alternative data in that it can harvest thoughts from unconventional players. This, in turn, can help you think outside the box. Once you delve into the details, you could profit from an insight that the market hasn’t yet woken up to.

Smart News

At Trade Nation we have developed our own source of alternative data based on social media. Our Smart News feed is exclusive to Trade Nation and available to all account holders. It harvests all financial market news from social media in one place, making it easy for you to identify specific threads that apply to your trading interests. You can use Smart News to follow our own curated news feeds. There’s even one that focuses solely on Elon Musk. If you prefer, you can create and customise your own channels in line with your market watchlists. Also, you get all the economic data as it’s released, with expert commentary, without having to pay large subscription fees to traditional media outlets.

Conclusion

Traders are always looking for an edge, to buy and sell ahead of the crowd and get the best price. Without a doubt, both technical and fundamental analysis will continue to play a major role in this. But alternative data has also been available to a small band of traders for some years now.  With the collection and analysis of data easier and quicker than ever, alternative data is growing in popularity as more and more traders discover its value.


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