Wall St. Computers Read and Trade on the News - Graham Bowley

Bloomberg monitors news articles and Twitter feeds and alerts its customers if a lot of people are suddenly sending Twitter messages about, say, I.B.M.

Lexalytics, a text analysis company in Amherst, Mass., that works with Thomson Reuters, says it has developed algorithms that make sense out of Twitter messages. That includes emoticons like the happy-face :) and the not-so-happy :.

Skeptics abound, but proponents insist such software will eventually catch on with traders.

“This is where the news breaks,” said Jeff Catlin, the chief executive of Lexalytics. “You have a leg up if you are a trader.”

The computer-savvy traders known as quants are paying attention. According to Aite Group, a financial services consulting company, about 35 percent of quantitative trading firms are exploring whether to use unstructured data feeds. Two years ago, about 2 percent of those firms used them.

Quants often use these programs to manage their risks by, say, automatically shutting down trading when bad news hits.

But industry experts say the programs are also moving the markets. Last May, as Greece’s financial crisis deepened, Wall Street computers seized on a news story with the word “abyss” in the headline and initiated sell orders, according to industry experts.

But some warn of a growing digital divide in the markets. Well-heeled traders who can afford sophisticated technology have an edge over everyone else, these people say.

As Twitter and other streaming tools become the bloodstream of our society, everything that is important will show up there first.

(Source: underpaidgenius)