Data is the lifeblood of the financial services industry: Everyday, traders and analysts comb through massive data sets to make the smartest financial decisions. But while traditional data sources, such as quarterly results, earnings calls, and expert industry insight, are still important, the recent big data trend has made alternative sources of insight critical in today's investment process.
As technology develops, emerging data sets coming from sources like social media and satellite imagery have become important resources for finance professionals looking to maintain an information-edge. A recent survey by global market intelligence and advisory services firm Greenwich Associates found that 80% of investors want better access to alternative data. Statistics like this highlight how alternative data has clearly moved from the fringes to the mainstream.
What does this mean for traders? It's straightforward: Alternative data is no longer alternative, but necessary for any trader to maintain an advantage in today's evolving market.
From Satellites to Stock Prices, Alt Data Has Proved Itself
Black Friday is a key date in retail. The results from this largely U.S.-focused holiday shopping phenomenon have long-factored into stock prices, as investment professionals recognize how vital the holiday shopping event is for the annual success of some of the world's largest retailers. Recently, analysts and trading professionals across financial services have been leveraging data from satellites to predict Black Friday sales traffic and holiday season results before they are publicly released. This head start has translated into a major advantage for investment professionals to better position themselves ahead of anticipated stock movements.
Investors have tapped into alt data sources such as satellite imagery to make trading decisions since the start of the decade. The geospatial analytics company Orbital Insight, for example, uses imagery collected by satellites to forecast in-store retail sales. Machine-learning algorithms analyze car traffic in retail parking lots, which has been proven to correlate to in-store sales, and ultimately help predict positive or negative fluctuations in stock prices. For example, Orbital Insight has released an analysis focused on images of JC Penney store parking lots over the last two years, which indicates a clear link between the year-over-year car count and stock price.
Alt Data's Goldmine: Twitter
Twitter is one of today's most important news and information sources. Founded in 2006, Twitter now has 328 million active users and has become the tripwire for news breaking around the world.
On August 11, 2016, journalist Brittany Weiss Tweeted a short message with an image that signaled a fire at the Motiva refinery in Convent, Louisiana. The content of this Tweet, one of 350,000 delivered on Twitter that minute, had important implications for stock and commodity traders.
The Convent refinery is the 28th largest in the United States. Once news spread later that day, oil futures increased as a result of the refinery going offline. Missing this news by a few minutes could have cost energy traders millions of dollars. Investors who were able to pick up on this early signal from Twitter had the opportunity and time to position themselves appropriately for the inevitable market upheaval.
Alternative Data Is Here to Stay
With the speed at which financial markets now move, modern traders can't afford to wait around for reports from traditional news outlets. If you are not already incorporating non-traditional data sets into your trading process, you are behind the times.
Management consultancy Opimas shared in its 2017 report "Alternative Data—The New Frontier in Asset Management" that investors are spending about 20% more each year on access to alternative data. In parallel, Greenwich Associates found that fund managers want better access to logistics (36%), evaluated prices (35%), private company data (33%), supply chain risk data (30%), and other data sets to further improve investment strategies and performance.
Furthermore, alternative data has become so prevalent the term “alternative data" itself is already out of date; more than 60% of asset managers, including traditional managers and hedge funds, rely on large non-traditional data sets to predict future market moves. This means alternative data should no longer be considered alternative, but necessary for any trader to maintain an edge in today's evolving market.
Think of alternative data as a bandwagon you don't want to miss: If your business is spending exceptional amounts of time combing through traditional data sources, profitable trades will slowly disappear through your rear-view mirror.