Nerds on Wall Street: Math, Machines, and Wired Markets

Chapter 9. The Text Frontier^[]

^[] This chapter is based on a talk given at Fidelity Investments' Center for Applied Technology, July 2008.

AI, IA, and the New Research

Alpha hunters are always looking for new territory. When a strategy becomes known and used by too many players, the collective market impact of getting in and getting out will squeeze out all the profit juice, and only the lowest-cost transactors (large sell-side firms and hedge funds) will be able to use it. The pack needs to move on.

The Web is promising new territory, but while it is full of information it is also something of a pain to deal with, so a case can be made that there's an economic rent (alpha) to be earned by doing a good job at using the Web effectively. This was suggested at the end of Chapter 4, "Where Does Alpha Come From?" This chapter gets into the specifics, showing real examples relating textual patterns and events (not just individual documents) to excess returns.

Bill Gross, of the PIMCO investment management company, described equity valuation as that mysterious fragile flower where price is part perception, part valuation, and part hope or lack thereof."^[] An old Wall Street proverb says, more tersely, "Stocks are stories, bonds are mathematics."

This has enough truth in it that looking for the right stories is a worthwhile activity. With hundreds of billions of pages available on the surface Web (the portion covered by search engines), and even more information stashed in proprietary ...