Parsing the News for Quants
A growing number of hedge funds are using computer-screened news as an input in their trading. What’s next in this area? The following report by Chidem Kurdas is based on a talk by Ben Goertzel, chief science officer of a firm called Quant the News LLC and director of research at the Singularity Institute for Artificial Intelligence.
He spoke at a conference last month. For more on this event, see Insider
Some firms offer to tailor the technology to the needs of financial users. For instance, Lexalytics software analyzes many types of texts—not just or even primarily news articles but all types of chatter including blogs, message boards, Tweets, text messages, RSS feeds. The software is designed to separate positive from negative news and remove the noise, creating sentiment scores that trading systems can utilize.
This technology is OK and works very well if there is a lot of news about
something, Mr. Goertzel says. In his view, most services offered are still very
simplistic and it is possible to do much more. His firm has a competing
prototype technology that he describes as more accurate. Called StockMood, it
uses artificial intelligence to analyze texts, classify their sentiment and
measure their potential impact on a stock's price direction.
Artificial intelligence is used to assess sentiment. Technology people such as entrepreneur and Singularity Institute founder Ray Kurzweil expect that AI will overtake human intelligence in a few decades. This expected event has been christened the “singularity”. It would certainly have repercussions for trading, among many areas.
A notable backer of singularity research is Peter Thiel—manager of global macro hedge fund Clarium, venture capitalist, founder of PayPal and a founding investor of Facebook. He’s even talked about how to invest in preparation for the singularity.
Human beings have general intelligence, in the sense that we can solve problems that did not exist when our brains evolved. By contrast, AI programs have been specialized and limited to the purpose for which they are created—the software that plays chess can’t screen message board chatter. Mr. Goertzel points out that Google is a brilliant program, but it does only one thing.
His interest is developing artificial general intelligence. As he describes it, this is an autonomous, self-reflective, self-improving, commonsensical intelligence that resembles the human mind but can expand its capabilities and become increasingly smarter than its creators. Once the singularity occurs, AGI will be able to invent technologies much faster than humans can.
The notion of a technology that is self-aware and begets better versions of itself may bring up images of HAL, the intelligent but murderous computer in the Stanley Kubrick movie “2001: A Space Odyssey”. Singularity proponents argue that the goal is to create an AGI that will be safe and beneficial—even endow it with moral principles.
Mr. Goertzel’s discussion of what AGI can do for trading is relatively straightforward. He says narrow AI can’t deal with regime changes, so human intelligence has to interfere to make the transfer from one regime to another. This causes delays and losses. For trading systems to automatically adapt to major market changes, they need to be controlled by AGI.
In his view, AGI is the next stage in the evolution of trading (chart 2). It
will ingest information ranging from Twitter messages to pricing data, identify
shifting patterns and adapt to regime changes even if these occur frequently.
For now, integrating sentiment analysis of news into real-time algorithmic trading is the thing. The focus is on finding better and faster ways of using quantitative indicators derived from text to predict the future of a security’s price more accurately. The next step is probably better risk control with news analytics, which could lead to something like AGI to adjust exposures as chatter indicates changes in a trading environment.
Hopefully, there won’t be any HAL wrecking the markets!