In finance, traders have their work cut out for them. Not only must they be acutely aware of what's happening in the market across various industries, but they must also possess the foresight to know what's coming next. This requires that they take advantage of all tools available to them to stay abreast of world news, developing events, and market trends.
Increasingly, those tools include alternative data. As revealed in the recent Dataminr report, "The New Data Paradigm for Traders: Alternative Data in the Mainstream," based on research conducted in conjunction with WBR Insights, 80 percent of traders now use alternative data when making investment decisions.
Tapping non-traditional data sets can help traders gain deeper insight into potential investments, make more accurate forecasts, and even provide a competitive edge. Armed with this intelligence, they're better equipped to get the results they are looking for.
Information isn't power for traders, it's currency—and alternative data can provide a layer of potential new insights to supplement their traditional data sources. In the age of real-time information, this kind of data can help alleviate some of the challenges that traders face like an uncertain market.
Consider Credit and Debit Transactions
One way to gauge the health of a consumer industry, or of a particular business, is by determining where consumers are spending their money. According to Goldman Sachs Assets Management, credit card transaction data has the potential to "provide an informational advantage."
Because credit card data offers a look into consumer spending habits, it can help traders anticipate sales results of an industry and even forecast the performance of certain companies, before quarterly results are released. If spending at hardware stores is up, for example, this may mean we'll soon see an uptick in the home improvement category, which bodes well for businesses in this space.
Look to Weather and Natural Disaster Data
Severe weather can have a huge influence on many trading decisions. When traders access real-time weather information, they can make more accurate predictions and more informed decisions.
In late 2018, Hurricane Michael had a major impact on energy companies, leading to reduced operations for more than 42 percent of current oil production and about 31 percent of natural gas production. At times like these, it's imperative that traders can accurately predict the effects of natural disasters on gas futures so they can improve their returns. Similarly, if a weather event destroys crops, traders can anticipate an impact on their agricultural investments. Imports and exports, consumer transactions due to a weather-related decrease in spending, tourism revenue—all are affected by the weather, so keeping a close eye on weather and natural disaster information can give traders a distinct advantage.
Rely on Social Media
Staying abreast of news that breaks on social media platforms can help traders stay ahead of the market and inform them about events that could shape their trades. Social media users have become "citizen journalists," breaking stories on the ground and publishing that information. Traders who tap into these new sources of information can connect the dots about a developing event much faster than if they were to see the story on the mainstream news.
Dataminr research shows that 54 percent of traders are using social media data today—but it's important to have the right system in place to capitalize on it. For instance, a trader could search for "soy" on a social media platform and see results for both the crop and the Spanish word for "I am," but technology that targets only the most relevant information can pare down a large amount of unstructured data to deliver targeted news.
This new data paradigm has the potential to maximize traders' awareness of the financial market, improve their trading decisions, and empower them to deliver the best possible results. It may be called alternative data, but it won't be an alternative for long.