Predicting Financial Market Performance with Real Time Web Data

A few days ago, I wrote that one lesson from Wall Street suggests that Google and other Web 2.0 giants will increasingly start “trading for their own account.” The same history of Wall Street firms suggests that there will be many new opportunities for specialized information services that supplement the services that are no longer provided by the search engines themselves.

Let me begin by repeating part of the “unorthodox history of Wall Street” according to Bill Janeway, as reported in the Release 2.0 issue on Web 2.0 and Wall Street:

Thirty years ago, Bill points out that the price of a trade was
regulated by the exchanges: it cost approximately 22 cents to trade
a share on the New York Stock Exchange. Unable to compete on price,
firms competed on the quality of their investment research, and
brokers’ relations to clients were based on the information and
insights they could provide.

Once the exchanges no longer regulated the price of a trade, prices
fell over time to current levels of a fraction of a cent per share,
or for large trades, effectively zero. As a result, sell-side firms
could no longer afford to do fundamental research. Two things
happened: independent research firms grew up that charge directly
for research, and more importantly, firms began to trade against
their clients
for their own account, such that now, the direct
investment activities of a firm like Goldman Sachs dwarf their
activities on behalf of outside customers.

In that issue of Release 2.0, I pointed out how search engine marketing firms are gradually morphing into the Gartners and IDCs of the search engine economy. Not only that, companies that mine web statistics, from Comscore to Hitwise have been scoring significant paydays. (Comscore’s stock is up 41% since its IPO, and Hitwise was recently sold to Experian for $240 million. Hmm…I wonder when Amazon will think to spin Alexa back out as an independent company?)
In short, there is a new economy of specialized trend tracking and data mining companies that is growing up in the shadow of the search engines and other Web 2.0 applications.

In an interesting coincidence, many of these players are also becoming of interest to Wall Street because the data they gather may turn out to be a mother-lode of information on the future performance of individual companies and the economy. We’ll be featuring a number of these companies at the Money:Tech Conference in New York next month, including:

  • DataUnison, whose analysis products were originally developed to help eBay powersellers, is now becoming more widely used by anyone who wants an inside peek at aftermarket demand for products. This, of course, can tell you whether a new product introduction was a winner or a dud, and may thus shed light on the upcoming financials of said company (and its suppliers).
  • Altos Research, a company that originally developed real estate market analytics for brokers, home sellers and buyers, has discovered that their data is equally interesting to financial institutions. From their website:

    “For investors and traders, Altos Research publishes the Altos Real Time Price Index(TM). The Index monitors properties in the same metropolitan statistical areas (MSA) as those captured in the S&P Case Shiller Housing Price Index (CSI) and the Radar Logic RPX upon which the Chicago Mercantile Exchange (CME) bases its housing futures markets. The result is an analysis and index value that is highly correlated to the CSI value released 12 weeks later. [Italics mine]

    altos vs. case-schiller

  • Connotate, unlike the two companies above, provides a generalized platform for data mining topics on the internet, from news sources to blogs to gossip on mailing lists and forums, as well as regulatory filings and other internal and external company data.

The point: the real-time nature of internet data means that investors no longer need to rely on either official government data or quarterly company filings, which are delayed by months. I’ve written before that real time is a big part of what makes Google different from most corporate back office data mining. These companies provide real-time data that was never accessible before.

As both Wall Street firms and Web 2.0 giants leverage their scale and access to information to extract more of the total value from the market, innovative companies are democratizing the tools of analysis and insight.