Twitter’s mood predicts the stock market?

Paul Raven @ 20-10-2010

I can’t really reword this one to sound any less (or more) incredible, so I’m gonna go straight to quotes:

The emotional roller coaster captured on Twitter can predict the ups and downs of the stock market, a new study finds. Measuring how calm the Twitterverse is on a given day can foretell the direction of changes to the Dow Jones Industrial Average three days later with an accuracy of 86.7 percent.

“We were pretty astonished that this actually worked,” said computational social scientist Johan Bollen of Indiana University-Bloomington.

You and me both, Johan, you and me both… but then, it’s a weird old interconnected world we live in, isn’t it?

“We’re using Twitter like a psychiatric patient,” Bollen said. “This allows us to measure the mood of the public over these six different mood states.”

As a sanity check, the researchers looked at the public mood on some easily-predictable days, like Election Day 2008 and Thanksgiving. The results were as expected: Twitter was anxious the day before the election, and much calmer, happier and kinder on Election Day itself, though all returned to normal by Nov. 5. On Thanksgiving, Twitter’s “Happy” score spiked.

Then, just to see what would happen, Mao compared the national mood to the Dow Jones Industrial Average. She found that one emotion, calmness, lined up surprisingly well with the rises and falls of the stock market — but three or four days in advance.

As daft as it sounds on the surface, this is probably pointing at some sort of core truth; it’s pretty much established that markets are emergent systems born of human interaction, so why shouldn’t you be able to get an idea of where things are going by finding a way to sample the mood of the planet?

That said, I’d very much like to know how wide-ranging the Twitter sampling was: did they use multiple languages, for instance, or just English? I suspect that Twitter’s demographic in geographical terms is still very white, Western, male and middle-class, too; would these results be strengthened by using more data from wider sources, or has a sort of accidental cherry-pick taken place? (White Western middle-class males are more likely to be stock owners or investors of one stripe or another, I’m guessing, so there’s probably some sort of inherent bias in using Twitter as a sample source.)

Even so, I’m fascinated by research that treats human civilisation as a system-of-systems with observable properties, and the rise of social networking is probably the catalyst for this growing field. Whether knowing how the system reacts and correlates will allow us to control it more effectively is another question entirely, of course… feedback is a powerful thing, but as any guitarist will tell you, it comes with risks. 😉


The Flash Crash and the trouble with transparency

Paul Raven @ 09-10-2010

A report at Ars Technica compares the computerised financial markets to a vast and infernally complex piece of multi-threaded software running on hardware that was never designed to cope with it (or vice versa), before telling us what I suspect most of us have already guessed: it’s a gigantic house of electronic cards. But ironically enough, part of the problem stems from the very transparency that the shift to electronic trading was supposed to bring with it:

Unlike the market of an earlier era, where humans executed trades by talking to (and shouting at) one another, the electronic communication networks (ECNs) that emerged in the late 70s logged every detail of every trade for later auditing. No more “he said, she said” when resolving a dispute or ferreting out fraud—just go to the tape. But then came the flood.

After a solid decade of moving almost all trading activity onto electronic systems (the NYSE floor is just there for show at this point), the market generates so much data that it’s nearly impossible for a mere governmental agency like the SEC to analyze. There are literally tens of thousands of quotes per second in hundreds of thousands of symbols across multiple electronic exchanges—the SEC would need the brain and computer power of the NSA to even begin to do a credible job of crunching this many numbers for a credible post mortem.

[…]

The amount of data isn’t just a problem for regulators. Much of the report details how the systems of the market participants were themselves overwhelmed in real-time with the sudden surge of digital information. Processing began to slow, queues filled, backlogs developed, and machines were eventually pulled offline as the humans intervened and tried to sort out possible data integrity issues.

Beyond the challenges of reconstructing events, the traders also use some subset of the data firehose that the market’s machines throw off today as input to train the algorithms that will run the market tomorrow. So at some point, we’ll wake up and realize that it’s really turtles machines all the way down. Put that in your bong and smoke it, Keanu.

Ouch. And it gets worse, too; go read the whole thing. I think the best way to sum it up in layman’s terms is that we’ve turned the financial markets into something a little like one of those “game of life” software ecosystems… which would be quite a fascinating idea if it weren’t for the fact that unexpected interactions within that ecosystem can affect meatspace in a pretty serious way.

The more I learn about derivatives and futures and all that “clever” quant stuff, the more I think it’s a bunch of hubristic mathematical voodoo bullshit that we’d do well to get shot of sooner rather than later; the only people it really seems to benefit are the wankers who thought it all up in the first place.


Glitch trading: narrativizing the actions of algorithms

Paul Raven @ 07-05-2010

Having mentioned the sensitivity of the markets with respect to the UK election results, it makes sense to point out Tim Maly’s recent post about automated trading programs and market movements.

The point is that 60% of stock trades are being done by machines, operating according to a set of algorithms and inputs, which (I’m pretty sure) do not include natural language parsing of the news.

Yet whenever the stock market makes a move, the financial press constructs post hoc narratives that explain what’s happened as a reaction to the news of the day, as if the news is what was was motivating the trades. […]

This fascinates me. Most stock market trading is being done by machines, but the stories we tell ourselves are about humans responding to new information. You can’t interview an algorithm about why it made a certain choice. In the absence of that knowledge, it seems clear that the financial press just makes educated guesses and acts as if correlation is causation. It’s speculative fiction.

Discuss. 🙂


Econopocalypse scenario #3654: the Fat-finger Collapse

Paul Raven @ 29-01-2010

Ars Technica has an interesting article about a couple of recent stock-market glitches caused by high-frequency trading algorithms run amok. Long story short: a screw-up at Credit Suisse was caused by “a trader who accidentally double-clicked an icon in a trading program’s interface, when he should’ve single-clicked.Yipes.

OK, so it’s not quite the same as a tired technician leaning on the nuclear launch button by accident, but given the utter dependence we have on the instruments of high-speed high finance, similar mistakes could cause global catastrophes. [image by Coffee Maker]

The problem is connected to so-called “day-traders”, computer-assisted stock deals that occur in the blink of an eye, often without much human interaction, and minor errors are amplified at the speed of light (or at least the speed of data in optical fibers) by the networks, causing fluxes that folk like you and I never notice, but which cost bankers and investors thousands of dollars in losses and fines…

Of course, the fact that such computer-driven volatility hurts day traders matters little to long-term investors. But the fear is that these glitches are fleeting indications that the system as a whole is vulnerable and unstable, and that the right combination of circumstances could cause what happend to RMBS to happen on a wider scale. This is especially true as even more of the trading activity, even among individual traders, shifts to automated platforms.

However, it’s not all doom and gloom; the last few years have seen a sharp increase in small trading firms of the two-guys-and-a-fast-computer type, small independent operators using the same techniques as the big banks to trade automatically through the blind of commercially-available trading software.

The Obama administration’s efforts to rein in high-frequency trading by eliminating flash orders and banning proprietary trading (much of which is HFT-based) from large banks will probably have the effect of leveling the playing field a bit for these smaller algo shops. As Matthew Goldstein at points out in his Reuters article on the topic, the prop desks may disappear, but the software and expertise will not. Instead of being concentrated at a few large banks, algo trading will just spread, as the talent behind it either jumps to new funds or goes solo.

Once again, the network corrodes hegemony… but whether a world where anyone and his dog can engage in automated high-frequency wheeler-dealing will be a safer, better and richer one remains to be seen.


EmoBracelet to remind traders not to be dicks

Paul Raven @ 19-10-2009

The *other* sort of emo braceletsBoy, those stock market trader guys sure can get the rest of us into a mess with their crazy high-jinks. But it’s not entirely their fault, you know – they just get a bit carried away in the heat of the moment. C’mon, we’ve all been there – emotions run high, you have to make a snap decision, and sometimes you get it wrong. Granted, for most of us there’s little chance of shafting the entire planet in the process…

But wouldn’t it be good if we could keep those traders calm? If we could lay a metaphorical cool hand of reason on their shoulders every once in a while and say “hey, maybe you’re thinking with your heart (or your dick) rather than your head”? Electronics giant Philips and financial behemoth ABN Ambro seem to think it’s a great idea, and have hence teamed up to develop a conceptual device called the EmoBracelet, which should achieve the same effect:

The gadget […]measures electrical signals from users’ skin to assess their emotional state. The technology is similar to a lie detector recognising the nervousness behind a fib.

The announcement by the two companies said online traders had nearly double the number of deals as those who traded through a broker and that online traders earned lower returns because of poor decisions.

”Driven by fear, they may sell too hastily when share prices drop. Driven by greed, they may be overenthusiastic,” the announcement said.

The EmoBracelet and another device, an EmoBowl, use electrical displays to show a person’s emotional intensity. The two items were designed to warn traders to step back and take a breather by alerting them to their heightened emotional state.

As a wearer’s emotions grow more intense, lights flicker faster on the bracelet and the colours inside the bowl change from a soft yellow to orange to a deep cautionary red.

Nice idea, guys, but I have to say that I’m not sure the EmoBracelet is going to prevent traders doing dumb things. After all, most of the folk I’ve worked with who were prone to agitation or emotional overinvolvement with their work would react rather badly to having their “heightened mental state” pointed out… and some of them would probably carry on pushing the envelope just to prove how on top of things they really were (in their minds, at least).

A version of the EmoBracelet that injected the trader with a hugely powerful soporific at the pertinent moment might be a little more useful, however… [story via Technovelgy; image by McWilliams Graphics]


Next Page »