Software Eats…Everything, Even on Wall Street
Marc Andreessen famously said, “Software is eating the world.” We have seen it time and time again with companies like Netflix, Airtable, Shopify and more. No matter the industry, there is a constant need to monitor disruptions, use the data to your benefit, or fold in response to the disruptors. It is the same story when it comes to the world of financial data. Waiting for annual reports, analyst reports, and quarterly figures is a thing of the past as artificial intelligence (AI) and alternative data increase trading efficiency. With alternative data shaking things up on Wall Street, a growing number of investors are asking how they can leverage these insights to improve trading strategies and gain more alpha.
Since the early 2000’s, alternative data companies have been utilizing natural language processing (NLP), sentiment analysis and machine learning (ML). These technologies generate effective trading signals and predictive modeling for future stock returns and complement existing systematic signals.
RavenPack led the movement towards NLP in providing new alpha in unstructured data through news, blogs, social media, earnings call transcripts and more. Thinknum indexes job listings, headcount, employee sentiment, pricing, store locations, among others to create structured datasets. Paragon Intel predicts company performance based on executive information mined from interviews and public records such as company aircraft activity.
The possibilities with this technology are limitless. Information once thought to be unquantifiable is being quantified thanks to advances in AI. Several industries have benefited from this progress including global financial institutions. The innovations continue and new software is launched each day.
The Eater Becomes The Eaten?
Companies have made tremendous progress in NLP where machine learning (ML) transforms unstructured, external textual data into actionable insights that investors can factor into trading strategies. However, we are still missing part of the picture. A Reuters article on the topic highlighted, “traditional financial data and corporate statements are so heavily mined nowadays that they offer little value.” Many companies carefully script speeches and statements to wrap negative messages around positive wording. When words cannot be trusted, and are deliberately crafted to hide what might be interpreted as negative, what are we left with?
NLP in finance was first introduced nearly 15 years ago. While the capabilities are still powerful, and it is possible to gain an edge, the information has become beta as newer capabilities are earning the alpha title. While words comprise 7% of human communication, tone of voice accounts for a staggering 40% and is the number one passive indicator of what someone is thinking. An edge that is simply too big to ignore.
“What an investor is really interested in is how to get a better understanding of a firm. […] The best they can do is to interact with the executives. […] The executives can change how they communicate. In fact, they are being coached to use certain words. They may, for example, sound more positive in their words than what they really know about the company. […] The tone of the voice is a channel that leaks emotional information and it is very difficult for people to hide this.”
That goes for company executives too. When CEOs account for 45% of a company’s performance it is worthwhile to analyze all aspects of their communication from word choice to sentiment and tone of voice.
The Next Frontier: Tone is the New Alpha
In the case of earnings calls or public presentations, where executives are prepped with scripted speeches and responses, the emotional information leaked through tone of voice can not be altered or hidden. It is not just our opposable thumbs that make human beings different from other animals. Our brains have uniquely evolved to allow us to produce a wider repertoire of voice tones. This communication superpower is what makes our species so special. Similar to fingerprints, no two voices are the same. Each individual has a unique tonal fingerprint with unique characteristics.
The only company to master this technology in finance is Helios Life Enterprises. Helios developed the sophisticated software required to analyze the audible tones and unique characteristics of over 10,000 U.S. public executives. Through tonal analysis, Helios generates novel sources of alpha that outpace the market. Did you ever want to know how impulsive an executive is or if they actually believe the words they said? Helios helps quant teams and fundamental buy-side investors alike achieve that and more.
This cutting-edge technology has revolutionized audio data in finance. Helios has achieved the highest level of earnings intelligence by peering deeper into nearly every corporate audio event across major U.S. firms. Through this newly developed channel, investors are able to make sounder decisions with proven results.
Tonal analysis can be layered with textual analysis, NLP and sentiment analysis, to intelligently connect more facets of complex and unstructured data. The result: a sharper understanding of conversational intelligence. Textual sentiment analysis can be leveraged in concert with proprietary tonal sentiment– only provided by Helios globally – to demonstrate when the text and tone are incongruous, revealing potentially misleading information. Where there is voice audio, there should always be tonal analysis. When there is tonal analysis, the highest level of conversational intelligence can be achieved.
The Choice is Yours, Eat or Be Eaten
Each component of human communication – words, tone of voice, body language and facial expressions – act as threads that comprise the tapestry of human intelligence. If one component is left out, the picture is incomplete. AI has the utmost potential to help humans gain a greater emotional awareness. However, when vital components of human communication, such as tone of voice, are excluded from analysis, valuable insights are lost and uninformed decision making persists.
Since company executives are responsible for nearly half of a company’s overall performance, gaining as much leverage on the emotions behind what executives say has never been more pertinent. When applied to finance and trading, the possibility for increased alpha and earnings intelligence is unquestionable.
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