Hello everyone:
So after reading a recent post here on WSO:
http://www.zerohedge.com/news/2013-01-14/it-took-algos-4-seconds-fully-…-Dell-headline
I am confused about how these algos work.
I understand a program's ability to make trading decisions based on quantitative indicators in a market.
However, I am confused as to how an algo can make a decision based on soft info./ qualitative/ "words" data, and translate it into a quantitative trading decision.
To me, a program may be able to identify certain words or phrases, however the context and meaning of these words seems like something that only a human would be able to determine as credible or meaningful.
Is there anyone who can explain this to me?
you can assign values to words and read a data feed. plenty of services out there that offer the news feed which you can mine for data. It's expensive and pretty hard to get right. You need enough capital to do this across a lot of opportunities. 4 seconds is interesting as it is surprisingly slow for something that must be electronic.
Yeah, I guess I will just never understand. That kind of data just seems to subjective to me for a machine to be able to consistently and correctly analyze it. Of course bulletins with "going private" are pretty easy to get right, I'm just thinking about more complex situations that may never-the-less be just as or more important.
if you can give me an example, dont forget they dont need to read EVERY news event, just be confident that the ones they do trade on, are accurately interpreted.
Nothing really comes to mind, and I know that most bulletins are quite straight forward. I'm just wondering how they assign values to these words given the vast depth of the english language and how different words in different contexts can mean different things.
It's not as though algorithms are trading on every news story that hits the wire. As trazer suggests, there are likely only a few reports that trigger an algorithm, and very few of them take place during market hours.
More importantly, I think you're overestimating how subjective the language in news articles is. If both of us can read the same news story and arrive at the same conclusion about what event is happening, then there is some objective meaning to the article. That's something that a computer can easily understand as well.
Ask yourself: how do you know that the article about Dell going private means that the shares will likely be purchased at a premium to the current market price? Once you answer that, you will know exactly how the computer arrived at the same conclusion.
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