Mining info from Web for financial sector

Mining info from Web for financial sector
PHOTO: Mining info from Web for financial sector

There are one billion people online every day expressing their views on one issue or another.

There has to be information out there which is useful in the financial or commercial world. Based on this premise, a Singapore-based company has set out to mine all that's being put out on the Web every day, and distil it into a few sentiment metrics that investors can use to trade the market.

Two of the shortcomings of financial market data - price, volatility and correlations - are that one, they reflect new unstructured information only with significant delay; and two, they don't "price" properly the shifting market sentiment and insights, says Marcello Fontana, founder and managing director of Wavecatch.

"We try to capture that sentiment on the ground as it happens, combines it with market data, to come up with short-term price forecasts for equities," he says.

According to Mr Fontana, the company's system scans the 800 million documents published in the various channels of the Web every day - news, blogs and social media platforms such as Twitter - in English and Chinese, and filters them for certain relevant keywords.

Documents with these keywords will go through further downstream analysis. Typically, 2.5 million "relevant" documents will be identified each week. The system will identify, for example, brands, sub-brands or names of companies with positive or negative mentions. The information will then be scaled and standardised.

This measure of sentiment will then be combined with market data such as company-specific time series, macromarket indicators such as index futures or bond indices.

The output is short-term, that is 24-hour, forecasts of volatility and price movements for that particular stock. Three or four signals daily will be generated across the markets.

The system now covers 240 big-cap stocks in the United States, UK, Greater China and Australia.

Wavecatch is focusing on the equities market first and intends to start off by licensing its sentiment metrics and forecasts to institutional investors, hedge funds and proprietary trading desks of banks. Over a longer term, it is looking to partner online brokers to develop products for the retail investors.

For retail investors, the system will have to be tweaked to predict the one-week performance of stocks, says Mr Fontana. Twenty-four-hour trading does not generally make sense for retail investors because they incur higher transaction costs.

According to Mr Fontana, Wavecatch has back-tested its systematic strategies. "Potentially, after transaction costs, the strategies could return around 15 basis points per day."

The brain power behind the company is impressive.

Mr Fontana, "half German, half Italian", has over 15 years of global experience in financial services and technology/media companies such as Wells Fargo Bank, Intuit, Standard Chartered Bank, Aegon and Fox/News Corp.

Prior to founding Wavecatch, he was managing director for Asia-Pacific at Fox Mobile (Fox/News Corp), and global head of R&D and innovation at StanChart, where he established and managed the $1 million a year Innovation Lab @ SMU.

He holds an MSc in econometrics/statistics, and earned his MBA (technology management) at UC Berkeley (Haas). He's been in Singapore for eight years.

The director of R&D and technology implementation at Wavecatch is Martin Ashton who has a PhD in robotics from Salford University, Manchester, UK. Yiyun Fang, who holds an MSc in economics and an MSc in finance is the senior econometrician in the firm.

So far $800,000 have been invested in the company since its inception last year. Mr Fontana and his co-founder have pumped in $100,000 of their own money. The firm also received a $220,000 grant under the Technology Enterprise Commercialisation Scheme administered by Spring Singapore and the Infocomm Development Authority of Singapore.

The rest are from his ex-colleagues, Mr Ashton and his wife, and a private investor.

"The algorithm and methodology that we've developed, we think they are quite unique," says Mr Fontana.

"If we take a step back, the system is applicable to many other domains. There's just this huge depository of data out there."

Wavecatch has come up with a way to "generate knowledge to make decisions" from all that data.

It is starting with financial market first because the feedback is immediate. And it decided to kick off with the equities market because the amount of data is more manageable.

Wavecatch 2.0 will try to recognise emerging macro events/sentiment, say, political unrests or elections. "We will try to map these events and chart a clear path to enter the foreign exchange or commodities market. For example, change in ethanol production subsidies could have implications for food prices."

Mr Fontana can see Wavecatch's technology being used in media, marketing or corporate ratings as well.

The company is in talks with strategic public relations company Watatawa to come up with a "trust rating" for companies. As opposed to credit rating which measures the credit standing of companies, the trust rating will measure things such as corporate governance, transparency and how forthright management is in communicating with all stakeholders.

"We have noticed that (especially after the global financial crisis), companies which come clean and own up to their mistakes and are seen as trustworthy, their share prices don't fall as much whenever they announce bad news," says Mr Fontana.

Wavecatch is looking into gathering such data from the Web, and create indices based on that and licence the rating globally.

Another application of its technology is generating market research data such as what are the consumers' views on certain brands or which features they like best in each of the various brands of the same product.

At the moment, Wavecatch is focusing its energy on the financial markets. In trying to sell its products to hedge funds, one of the most common questions the firm is asked is: "If your system is that good, why don't you set up your own hedge fund to trade the market? Why do you want to share it with the world?"

Wavecatch, says Mr Fontana, sees direct licensing model as a high business impact, and low time-to-market proposition. "Wavecatch will always be a tech company."

But that doesn't preclude it from setting up its own fund if the take-up in the licensing business is not as encouraging.

Last week, Wavecatch participated in the TechVenture event and Mr Fontana pitched the company to five earlystage venture capital funds and a few potential users. "So far we've seen a fair share of interest, which we cautiously take as a good sign," he says.

Mr Fontana decided to venture out on his own after spending 15 years in big companies because "big companies are slow to do things".

"If I don't do this, I'd always be left wondering. I like the challenge," he says.

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