Wednesday, April 16, 2008

Yellowbrix Powers Sentiment Analytics that Drive Financial Markets

Jeffrey Massa, CEO of Yellowbrix grabbed my ear at the Buying and Selling eContent conference in Scottsdale, AZ, for good reason it turned out. Yellowbrix is well known in both online and enterprise markets for its content aggregation, portal development tools and financial information services, but like everyone else in the aggregation game they've been looking at higher value tools to create better opportunities for insight through their content. The Sentiment Performance Indicator tool that Jeff showed me is one such tool - and a killer app at that.

The Sentiment Performance Indicator is a set of data and graphics tools built off of a Yellowbrix-developed semantic engine that munches through the content in its media feeds to determine whether stories on a particular company are positive, negative or neutral. This data then drives simple data displays and charts that enable one to get a grasp on likely market sentiment for a company's securities very quickly. This can be especially important before a securities market opens - there's that period before trading begins when analysts people on sales and trading desks in financial institutions try to get a fix on market sentiment is overall and for particular investments. Traditionally this is done with phone calls to trusted contacts, browsing through news, morning reports and other more quantitative tools to get a feel for what's going to happen.

The Sentiment Performance Indicator takes this type of activity to a whole new level. Instead of working on largely "seat of the pants" sentiment, the Sentiment Performance Indicator gives data that provides really strong correlations with likely market activity. In the chart on the right, reduced a bit but I hope still readable, shows in this instance a graph of the Dow Jones Industrial average in blue. The Sentiment Performance Indicator in this instance looks at all the news relating to the index and the companies that comprise it and out pops the sentiment data. Note how the green line, showing positive sentiment, tracks strongly ahead of negative sentiment for today before the market opened. Note the strong correlation with how the market performed after the open. Note also that as positive sentiment began to drop and close in on negative sentiment that the market levels out. Highly predictive.

Jeff walked me through similar displays for individual stocks and the data correlations were truly eye-popping - this coming from someone who stared at Reuters and Quotron screens and wallboards for more than a decade. What I found interesting was not only how closely the sentiment data tracked and predicted subsequent stock performance but also how changes in sentiment correlated closely to typical trading activities. For example, in one particular example Jeff showed a stock where negative sentiment rose sharply and there was a subsequent selloff. However, there was at the same time a steep fall in negative sentiment but no increase in positive sentiment. In other words, once a stock starts falling from bad news the damage is done and it will keep falling until there is countervailing news - to put it another way, once you have bad news, no news is the equivalent of bad news. That is a very, very accurate portrayal of real-life market activity.

Another example of a display in the Market Sentiment Indicator is a simple tool that shows cumulative sentiment data, the top positive companies and the top negative companies. Very easy to interpret - and very useful not only to securities traders but investor relations, management dashboards and other business applications where there is a need to see at a glance the real-time changes to how companies are being perceived in the marketplace.

This is certainly not the first sentiment analysis tool on the marketplace and no doubt there are several major investment banks, asset management firms and hedge funds that have cooked up their own custom version of such a tool. But I must say that to my jaded eyes this was one of the most powerful applications of semantic content analysis that I have seen in a long time. The top positive/bottom negative display should be on every desk tracking U.S. markets unquestionably, an invaluable tool that can help financial experts prepare for their trading day effectively and to get a handle on how trends are likely to unfold during the day.

More sophisticated tools are no doubt required for sentiment analysis to trigger low-latency basket trading during the market day, but for moving one's seat-of-the-pants sense of market sentiment into more firmly grounded views of market realities, especially in those critical minutes before markets open, this has to be one of the more powerful human-oriented tools that I have seen since PCs first started providing bar and line charts for securities analysis. No kidding. Thanks, Jeff, for a demonstration of such a simple yet powerful application of value applied to aggregated content.
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