Will Algorithmic Trading Change the Way We Invest?

May 7, 2007

Stock prices often move up or down when news comes out that effects a company or an industry. How would you like to be able to take advantage of stock price changes based on news such as quarterly earnings reports, industry events, political changes, or management shake-ups?

A product from Reuters called NewsScope offers stock traders this capability. Reuters recently enhanced their NewsScope product and put out a press release summarizing its capabilities:

“Reuters system will read news articles and score how positive or negative they are. The system will enable customers to analyse news across thousands of companies, far more quickly than can be done by humans. This will enable trading machines to react to market moving news in milliseconds.”

NewsScope will actually perform automated stock trades based on positive or negative news about a company or industry. The press release goes on to explain a little on how the system works:

“It works by assigning numerical “sentiment scores” to words or phrases which are then processed to give an overall positive, neutral or negative score to the company in the news article. These scores can be added together to calculate the prevailing sentiment for a company, a sector, an index – or even to assess global market sentiment.”

Since the high cost of the service will limit it to large investors the technology isn’t really available to mainstream traders. However, the way technology evolves perhaps one day average Joe day traders will have access to similar services. The whole concept goes against what I’ve been taught about a buy and hold investment strategy.

If a company is a good long term investment in the morning, it should still be a good long term stock after the earnings reports come out in the afternoon. I don’t know how this could affect the volatility and stability of the stock market but in my opinion a service like this in the hands of average investors would unfortunately shift the emphasis from long term investing to frantic day trading. What do you think?

Ben

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Ben

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn’t like the other kids… His addiction to personal finance has paid off for his family and now he’s helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.


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Comments

2 Responses to Will Algorithmic Trading Change the Way We Invest?

  • MyOwnMillions

    If the “average joe” has access to it, it will only increase the volatility and let the big institutions make more money by taking advantage of the situation. Bad idea.

    If the system is really used by “everyone” then there is no point of the stock market since the supply and demand is always one sided, so no trades can happen.

  • Bobk

    Our company “allows” it, but has no company-wide policy. It is implemented based on a specific manager’s biases. In other words, if your manager feels more secure by counting heads, you ain’t gonna telecommute. My current manager likes to count heads, but allows telecommuting for things like sickness or workmen (example: HVAC) coming to the employee’s house.

    I tend to have a lot of work done to my house. Really. My house was built in 1928, it needs regular work.

    bobk

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