Machines can read the news now, but can they be trusted to act on it? Theres been a lot of talk about machine-readable news since our Q1 2008 feature*, but does that go any further than adding bells, whistles and meta-tags to the text streaming across the bottom of the screen? Spurred on by recent events, William Essex has returned to the search for a genuinely machine-usable news solution.

The Shock of the News

There’s a lot of news about these days, and much of it has the capacity to impact trading outcomes. The frustrating part, though, is that the line from event to impact is neither predictable nor necessarily direct. There are green-amber-red statistics on US mortgage arrears/defaults, and the tale has been told of how the rating agencies heralded the downturn with sweeping downgrades just as soon as they saw the lights change. But would you, today, programme a causal link between those mortgage numbers and, let’s say, the banking sector in Iceland?

The global financial sector is not going to make this self-same mistake next time. But for the rest of us, the more useful lesson (apart from “Nobody knows anything”, page 84, and “Thomas Jefferson was right”, page 18) is that all news is potentially dangerous. It seems obvious to say that news is a factor that might usefully be taken into account in any algorithmic or automated trading strategy. But the further you stretch your definition of news, the less obvious it becomes.

The machine-readable news business has tended to define news as directly relevant data that can be digitised into numerical form. This is not a criticism. If you’re trading an asset class, you need the data relevant to that asset class. Stephen Mitchell, CEO of Weather Insight, says: “At the end of the day, trading is just an information arbitrage. You get the information faster than the next guy, you win. Second place doesn’t pay.” True enough. But there is a trend, accelerated by recent events, towards a “layered” approach to news. The foundation layer is the immediate trading data. Then there’s the tagged news about the company, asset class, market, that can also be readily digitised. Then there’s the economic news, then, then, then. ...

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