Fishing With Alternative Data

February 15, 2018 07:00 AM

Merriam-Webster defines data as, “Factual information (such as measurements or statistics) used as a basis for reasoning, discussion or calculation.” 

Traders use data in all forms to construct the basis for their trading decisions. In the past, this involved earnings reports and sales statistics for equity traders and perhaps weather reports and supply/demand calculations for commodity traders. 

With the onset of the personal computer in the early 1980s technical, systematic traders who attempted to predict market movements based purely on price and volume statistics in markets emerged. These traders did not use data to form an opinion of where they thought a market was moving, they believed that those fundamental factors were worked into price, so price was all that is needed to determine market direction. 

The second definition for data in Webster’s is, “Information in digital form that can be transmitted or processed.” This more closely describes the technical traders’ use of data. It is an input that when measured, rated and categorized can reveal trends and patterns. These trends and patterns are what traders attempt to exploit. 

Growth and improvement in computing technology has allowed traders and data scientists of all stripes to learn new things through the ability to analyze what previously used to be unmanageably large amounts of data. 

After years of innovations regarding the ability to analyze and manage reams of data, traders and data scientists have looked at the input side and discovered that innovations in analyzing data can now be applied to new forms of data. And these new forms of data are exploding in size and scope. Technological advances across a whole spectrum of disciplines and the ability to share the data it has created through social media and other media has exponentially grown datasets. 

Alternative data refers to all these new inputs that require the technological advances to make sense of them. 

Webster’s third definition of data is, “Information output by a sensing device or organ that includes both useful and irrelevant or redundant information and must be processed to be meaningful.” 

This more closely aligns to what we describe as alternative data over the next 20 plus pages. 

C2 Capital Management Managing Member Chris Randle and his team break down and define alternative data, its value and uses in this month’s feature subject. 

One of the interesting things we have learned is that while highly quantitative in nature, the ability to successfully utilize alternative data takes imagination and the ability to think outside of the box. Using satellite data to count cars in parking lots as a basis of analyzing the stock price of a major retailer is just as much about alternative thinking as alternative data. 

 People are looking in places they haven’t looked before and that takes more than the ability to crunch numbers. Look again at that third definition of data. It includes both useful and irrelevant or redundant information. Our cover art tries to illustrate this but could be a touch misleading. Alternative data does not guarantee success, but it represents an entirely new and untouched fishing hole. It includes boundless, and to some extent untapped, opportunities. The hard work needed to pull useful information or fish from this data remains. Every trader with a PC and an exchange data feedback in the early 1980s didn’t become rich. They were, however, fishing in a new and largely untapped fishing hole with boundless opportunities.   

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.