September 11, 2013

Alpha Bet

We smell autumn on the wind in Denver.

Soon the backbone of the continent will transform from verdant to orange and yellow and caramel as the aspens salute departing summer. It’s a process spanning weeks, an epoch compared to equity-market timeframes nowadays.

Investors want an edge, and it’s important for investor-relations pros to recognize what that means. It seems like everyone has lost patience with patience. One IRO lamented this week: “I am now starting to be convinced that are very few ‘rational’ price-setters. Even the long-only funds are very short-term.”

It’s against insider-trading law for advantage to spring from valuable information gleaned privately from another person, so instead traders are winnowing the public social chaff of the many for “alpha” – a way to outperform expected market returns.

Social Market Analytics, a Naperville, IL firm run by PhDs in theoretical chemistry and electrical engineering, tracks what it calls S-factors, turning tweets into data science for identifying stocks and sectors signaling directional outperformance.

NYSE Technologies, the data arm of the exchange, is now selling SMA’s Sentiment Signature Feed, which structures and quantifies social media data to provide actionable intelligence for financial markets to exchange customers. Short-term directional trading.

At TABB Forum, the trading community’s hub, last week TABB Group staff wrote a piece called “Listening for Alpha in Social Chatter,” and called Twitter the “thermometer” for public opinion on financial topics. The pursuit of vital data from massively random public streams of consciousness has spawned a gold rush in startups hoping to find buried in aggregated 140-character snippets the alpha holy grail.

Maybe it’ll work. What struck me is that we’ve reduced the creative and risk-riven process of forming capital and fostering growth that produces wealth down to momentary change, in effect the diametric opposite of the old idea. Finding alpha – divergence from a standard for some measurable but brief period of time – has displaced the pursuit of value. From reading The Intelligent Investor to Seeking Alpha. And tweeting it.

One could argue that alpha is a contemporary version of timeless ethos, a desire to discover the undiscovered. But it’s directional, random, temporal. It’s not a destination but an event.

It’s the opposite of the IR goal, which is to reduce divergence, dampen the volatility the increases equity cost of capital and distorts pricing in repurchase programs. Funny isn’t it. You’re trying to prevent the very thing institutions relentlessly seek.

And that’s Reason No. 4,785 why market structure matters to IR today. If investors are going to use S-factors to extract alpha from your shares, you can’t measure IR success the same old way. We don’t have that market anymore. Maybe you need to measure, say, Gamma.

What’s that? Stay tuned.

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